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The American System was an economic philosophy pioneered by Alexander Hamilton and President George Washington, promoted by President John Q. Adams and Senator Henry Clay, and established fully during the Civil War by President Abraham Lincoln. It called for a high tariff to support internal improvements such as road-building and railroads, and to protect American wage rates from diminuation to foreign 'lower' wage rates. In addition, the Government was to promote universal public education to increase productivity and creativity among the citizens; and to promote Industry through a national banking system such as that created under Washington (First Bank of the United States), Madison (Second Bank of the United States), and Lincoln, which lasted until replaced by Wilson's Federal Reserve System.

This approach was intended to allow the United States to grow and prosper, to become economically independent and nationally self-sufficient.

This system of economics had three core principles:

• The establishment of a protective tariff, a tax on imported goods that protects a nation's business from foreign competition and workers from loss of high wages (middle class). Congress passed the first tariff as its first act under President Washington's administration to set the stage for revenue without income taxation and national development of the interior. Successive protective tariffs were passed especially after the War of 1812 in 1816 and again in 1861 which made European goods (mostly British) more expensive and encouraged consumers to buy relatively cheaper American-made goods, thus promoting industrial development.
• The establishment of a national bank that would promote a single currency, making commerce easier, and issued what was called sovereign credit, i.e., credit issued by the national (federal) government, rather than borrowed from the private banking system. In 1789 and 1816, Congress created the first and second Bank of the United States under President's George Washington and James Madison respectively.
• The improvement of the country's infrastructure, especially transportation systems, making commerce faster and easier. Poor roads made transportation slow and costly.

The American System has been increasingly ignored by historians and economics professors in modern times.

Philosophical basis of the American System

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 also rejecting the harsher aspects of mercantilism such as seeking colonies for markets. As later defined by Senator Henry Clay, the "American System" was to unify the nation north to south, east to west, city to farmer and so on. 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 American System also emphasized the importance of the power of the human mind to innovate, as the most important topic of discussion for economists. As Abraham Lincoln himself put it, in a speech delivered on the stump in his 1860 campaign, "Man is not the only animal who labors; but he is the only one who improves his workmanship. This improvement he effects by Discoveries and Inventions."

Among the important improvements created under the American system during its early years (1789-1859) were the Erie Canal and the Cumberland Road.

The opposing view, represented by Thomas Jefferson (until later years when he embraced Hamilton's economic system as a result of the War of 1812) and later by the Confederacy, maintained that the U.S. was better off as an agrarian nation with a plantation economy with a weak, small federal government-- which, the proponents of the American System argued, would represent a feudal society, as desired by the British and enslave the country to foreign manufactures reducing citizens to pauper's wages.

The name, "American System," was coined 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, Henry Carey wrote:

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.

Historic support base for the American System

The American System was supported by New England, the Mid-Atlantic, the Mid-West, and West which produced a heavy manufacturing base in such states as New York, Massachussetts, Pennslyvania, and Michigan, because it protected their new factories from low-wage foreign competition, thus, allowing higher wages and moderately high prices to exist side by side.

The South, on the other hand, opposed the American System because its plantation owners were heavily reliant on production of cotton for export, using cheap slave labor of African-Americans and poorly paid whites to service. These policies produced a feudal Plantation System at odds with the rest of American society, and with the Declaration of Independence, which proclaimed that "All men are created Equal," deserving the protection and promotion of "Life, Liberty, and the Pursuit of Happiness." The plantation owners not only feared retaliatory tariffs on their cotton and other agragrian based products from other countries, but the higher costs of manufactured goods that their lower paid white or European-American citizens could not afford. During the course of of the 1840s-1850s, successive Presidents from the Democratic Party (the party of the South and Farmers at the time) were able to stop the full implementation of the American System. It wasn't until the election of President Abraham Lincoln in 1860 that Washington's, Hamilton's, Adams', and Clay's system would be fully enacted with a series of laws (due in part to the lack of Southern opposition) in the government during the Civil War. For example, Lincoln's Morrill Tariff was 48%.

Lincoln's plan of Reconstruction envisioned extending the American System into the South by building railroads, and by promoting the development of manufacturing there to diversify their economy and unite it with the North's (New England, Mid-Atlantic, Mid-West, and West). This was slowed down by the Radical Republicans in Congress who wished to punish the South after the War with military occupation, and by the Southern plantation owners who were clinging to power through Jim Crow and the rise of the Klu Klux Klan.

Policies of the American System

• Government support for the development of infrastructure;
• The regulation of privately owned Industry, to ensure that it meets the nation's needs;
• Government support for the development of science and public education;
• The use of sovereign powers for the regulation of credit (see national bank) to encourage the development of the economy, and to deter speculation;
• The selective use of the powers of taxation to promote productive activity over speculation;
• The use of tariffs and protectionism to defend domestic manufacturing, and as a form of indirect taxation, as an alternative revenue source to direct taxation;
• Rejection of class struggle, in favor of the "Harmony of Interests" (loosely paraphrased by Ted Kennedy as "a rising tide lifts all boats.")
• Opposition to free trade and laissez faire as proposed by Adam Smith.

Supporters of the American System

• • George Washington, first President of the United States and Father of the Country.
  • Alexander Hamilton, first Secretary of the Treasury (see his Report on Manufactures).
  • John Q. Adams, sixth President of the United States.
  • Henry Clay, Senator from Kentucky.
  • Henry C. Carey, Lincoln's economic advisor and leading economist of 19th century.
  • Abraham Lincoln, sixteenth President of the United States, known as the Great Emancipator.
  • William McKinley, twenty-fifth President of the United States.
  • Theodore Roosevelt, twenty-sixth President of the United States, the Rough Rider.
  • Franklin D. Roosevelt, thirty-second President of the United States, who's New Deal which among other internal improvements built the TVA.
  • Friedrich List,leading German economist who helped Bismarck's Germany.

Important reading on the American System

• • • Report on Manufactures
    • The Harmony of Interests

External links

• Excerpt from The Harmony of Interests
• The Tariff and Southern Secession
• "Kicking Away the Ladder," by Ha-Joon Chang in the "Post-Autistic Economics Review."

• Economic theories