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American School (economics)
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- See also American System (economic plan).
The American School, also known as "National System", represents three different yet related constructs in politics, policy and philosophy. It was the American policy for many decades, waxing and waning in actual degrees and details of implementation. Historian Michael Lind describes it as a coherent applied economic philosophy with logical and conceptual relationships with other economic ideas.
It is the macroeconomic 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).
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Encyclopedia
- See also American System (economic plan).
The American School, also known as "National System", represents three different yet related constructs in politics, policy and philosophy. It was the American policy for many decades, waxing and waning in actual degrees and details of implementation. Historian Michael Lind describes it as a coherent applied economic philosophy with logical and conceptual relationships with other economic ideas.
It is the macroeconomic 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:
- protecting industry through selective high tariffs (especially 1861–1932) and some include through subsidies (especially 1932–70)
- government investments in infrastructure creating targeted internal improvements (especially in transportation)
- a national bank with policies that promote the growth of productive enterprises.
It is a capitalist economic school based on the Hamiltonian economic program. The American School of capitalism was intended to allow the United States to become economically independent and nationally self-sufficient.
The American School'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.
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.
History
Roots
The American School 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.
Leading proponents were economists Friedrich List (1789-1846) and Henry Carey (1793-1879). List was a leading 19th Century German and American economist who called it the "National System" and developed it further in his book . Carey called this a 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.
The American School included three cardinal policy points:
- 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
- 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
- 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
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 School economic philosophy that distinguishes it from the systems of Adam Smith or Karl Marx:
- 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.
- 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.
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.
The Government issue of fiat paper money has also been associated with the American School from the 1830s onwards. The policy has roots going back to the days of the American Colonies, when such a type of currency called Colonial Scrip was the medium of exchange. As early as 1837, John C. Calhoun called for a debt-free currency issued and controlled by the Government. Such a policy would reduce the profits of the banks, and in response to this, the banking institutions threw their support behind the British school, espousing the gold standard throughout the 1800s.
In the Civil War, a shortage of specie led to the issue of such a fiat currency, called United States Notes, or "Greenbacks". Towards the end of the Civil War in March 1865, Henry C. Carey, Lincoln's economic advisor, published a series of letters to the Speaker of the House entitled "The Way to Outdo England Without Fighting Her." Carey called for the continuance of the Greenback policy even after the War, while also raising the reserve requirements of the banks to 50%. This would have allowed the US to develop its economy independent of foreign capital (primarily British gold). Carey wrote:
The most serious move in the retrograde direction is that one we find in the determination to prohibit the further issue of [United States Notes]...To what have we been indebted for [the increased economic activity]? To protection and the " greenbacks"! What is it that we are now laboring to destroy? Protection and the Greenback! Let us continue on in the direction in which we now are moving, and we shall see...not a re-establishment of the Union, but a complete and final disruption of it.
Carey's plans did not come to fruition as Lincoln was assassinated the next month and new President Andrew Johnson supported the gold standard, and by 1879 the U.S. was fully on the gold standard.
Advocacy
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 and 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.
According to U-S-History.com
Clay first used the term “American System” in 1824, although he had been working for its specifics for many years previously. Portions of the American System were enacted by Congress. The Second Bank of the United States was rechartered in 1816 for 20 years. High tariffs were maintained from the days of Hamilton until 1832. However, the national system of internal improvements was never adequately funded; the failure to do so was due in part to sectional jealousies and constitutional scruples about such expenditures.
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.
The term became synomonous with other phrases such as "National System" and "Protective System" as it was used over the course of time.
Implementation
An extra session of congress was called in the summer of 1841 for a restoration of the American system. When the tariff question came up again in 1842, the compromise of 1833 was overthrown, and the protective system placed in the ascendent.
Due to the dominance of the then Democratic Party of Van Buren, Polk, and Buchanan the American School was not embraced as the economic philosophy of the United States until the election of Abraham Lincoln in 1860, who with a series of laws during the American Civil War was able to fully implement what Hamilton, Clay, List, and Carey theorized, wrote about, and advocated.
According to an article at
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 United States continued these policies throughout the later half of the 19th century. President William McKinley (1897–1901) 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.
The American System was important in the election politics for and against Grover Cleveland, the first Democrat elected after the Civil War, who, by reducing tariffs protecting American industries in 1893, began rolling back federal involvement in economic affairs, a process that continued until Herbert Hoover's "too little, too late" attempts to deal with the worsening Great Depression.
Evolution
As the United States entered the 20th century, the "American School" was the policy of the United States under such names as: "American Policy", "Economic nationalism", "National System", "Protective System", "Protection Policy", and "Protectionism", which alludes only to the 'tariff policy' of this system of economics.
This continued until 1913 when the administration of Woodrow Wilson initiated his The 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 School 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 1929. President Herbert Hoover responded to this crash and the subsequent bank failures and unemployment by signing the Smoot-Hawley Tariff Act, 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. At the close of World War II, the United States now dominant in manufacturing with little competition, the era of free trade had begun.
In 1973 when the "Kennedy" Round concluded under President Richard Nixon, who cut U.S. tariffs to all time lows, the New Deal orientation towards reciprocity and subsidy ended, which moved the United States further in the free market direction, and away from its American School economic system.
List's influence among developing nations has been considerable. Japan has followed his model. It has also been argued that Deng Xiaoping's post-Mao policies were inspired by List.
See also
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) vol 2
- Joseph Dorfman. The Economic Mind in American Civilization, 1865–1918 (1949) vol 3
- 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, (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 1932–40 (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)
- Edward Stanwood, American Tariff Controversies in the Nineteenth Century (1903; reprint 1974), 2 vols., favors protectionism
Older books
- W. Cunningham, The Rise and Decline of the Free Trade Movement (London, 1904)
- G. B. Curtiss, Protection and Prosperity; and W. H. Dawson, Protection in Germany (London, 1904)
- Alexander Hamilton, Report on the Subject of Manufactures, communicated to the House of Representatives, 5 December 1791
- F. Bowen, American Political Economy (New York, 1875)
- J. B. Byles, Sophisms of Free Trade (London, 1903); G. Byng, Protection (London, 1901)
- H. C. Carey, Principles of Social Science (3 vols., Philadelphia, 1858–59), Harmony of Interests Agricultural, Manufacturing and Commercial (Philadelphia, 1873)
- H. M. Hoyt, Protection v. Free Trade, the scientific validity and economic operation of defensive duties in the United States (New York, 1886)
- Friedrich List, Outlines of American Political Economy (1980 reprint)
- Friedrich List, National System of Political Economy (1994 reprint)
- A. M. Low, Protection in the United States (London, 1904); H. 0. Meredith, Protection in France (London, 1904)
- S. N. Patten, Economic Basis of Protection (Philadelphia, 1890)
- Ugo Rabbeno, American Commercial Policy (London, 1895)
- Ellis H. Roberts, Government Revenue, especially the American System, an argument for industrial freedom against the fallacies of free trade (Boston, 1884)
- R. E. Thompson, Protection to Home Industries (New York, 1886)
- E. E. Williams, The Case for Protection (London, 1899)
- J. P. Young, Protection and Progress: a Study of the Economic Bases of the A merican Protective System (Chicago, 1900)
- Clay, Henry. The Papers of Henry Clay, 1797–1852. Edited by James Hopkins
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