American System (economics)

From Academic Kids

The American System was an economic regime pioneered by Henry Clay which created a high tariff to support internal improvements such as road-building. This approach was intended to allow the United States to grow and prosper by itself, without foreign products or foreign markets. The plan had three main actions. The first was to establish a protective tariff: a tax on imported goods that protects a nation’s business from foreign competition. Congress passed a tariff in 1816 which made European goods more expensive and encouraged consumers to buy relatively cheaper American-made goods. The second action of the American System was to establish a national bank that would promote a single currency, making trade easier. In 1816, Congress created the second Bank of the United States. The third step in the American System was to improve the country’s transportation systems, making trade faster and easier. Poor roads made transportation slow and costly.

Philosophical basis of the American System

The American System 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. The opposing view, represented by Thomas Jefferson and later by the Confederacy, maintained that the U.S. was better off as an agrarian nation with a plantation economy -- which, the proponents of the American System argued, would represent a feudal society, as desired by the British.

The name, "American System," was coined to distinguish it as a school of thought from the dominant theory of economics at the time, the British System. In a polemical 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.

The high tariff was supported by New England, which had a heavy manufacturing base, because it protected the factories from foreign competition and allowed higher prices. The South, on the other hand, produced cotton for export and feared retaliatory tariffs on its products from other countries.

Among the important improvements created under the American system were the Erie Canal and the Cumberland Road. Perhaps the most important 19th Century proponent of American System economics was Abraham Lincoln's advisor, Henry C. Carey, author of The Harmony of Interests.

Among the hallmarks of the American System approach are:

  • Government support for the development of infrastructure;
  • The regulation of privately held infrastructure, 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 advocacy of protectionism, and opposition to free trade;
  • Rejection of class struggle, in favor of the "Harmony of Interests" (loosely paraphrased by Ted Kennedy as "a rising tide lifts all boats.")

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