The American System

Commodore Vanderbilt's Locomotive

The "American System" is the name by which American protectionist school was known during the 19th Century.

According to British Mercantilism of the 17th-18th Century, the American colonies were supposed to serve merely as a source of cheap raw materials (cotton, hemp, pitch, timber, iron ore, indigo, etc.) for English industries, and a captive market for English-manufactured high-value goods (finished cloth, metallurgy, crafts). Most manufacturing in the colonies was severely restricted by law. At one point, an American colonist who wanted something as simple as a nail, had to import it from England. By the Navigation Acts, American colonists were also forbidden from trading with any other country but Britain.  Of course, the colonies being so far away and difficult to supervise, British Mercantilist laws were frequently flouted – illegal production was carried on, foreign smugglers routinely visited American ports. This had been going for so long that American colonists had grown quite used to it. But by the 1760s, the British crown realized it couldn't turn a blind eye to these goings on and decided to enforce the Mercantilist laws strictly in the colonies. This was one of the provocations in the chain of events that led to the American Revolution of 1776 - the same year Adam Smith published his Wealth of Nations.

Early American writers embraced the liberal Enlightenment ethos not only in their politics, but also in their economics and, in that respect, accompanied intellectual developments in Europe.  Thomas Jefferson was an enthusiast of French liberalism, particularly the works of the Physiocrats and their liberal progeny, the ideologues like Destutt de Tracy and Jean-Baptiste Say.  But Americans added a few twists of their own.  One that looms large is a concern with population growth.  The US being relatively underpopulated, early American writers like Benjamin Franklin, paid special attention to ways of encouraging population growth.  Free trade between American states was instituted with the 1787 Constitution. 

Although Mercantilist laws were gone with independence, trade with Britain continued and little was done to change the old dependent specializations. On the contrary, they were deepened. In the first half of the 19th C., Britain underwent an industrial revolution, at the spearhead of which was cloth-manufacturing. The great cloth-weaving mills of Lancashire required raw cotton as a input. And they looked abroad to supply it. By1840, more than 50% of the entire world's cotton crop was destined for British textile industries.  In response to increased British demand, cotton plantations – and slavery – in the American South were rapidly expanded and deepened. America's dependence on primary commodity production grew rather than receded. By 1860, some 85% of the exports of the United States was raw cotton. Much of the remainder were other primary commodities, like iron ore, indigo, tobacco, rice., etc. The United States seemed destined to remain a overwhelmingly agricultural-based primary commodity producer .

By contrast, since independence, and through the first half of the 19th C., American manufacturing was struggling. American-made cloth could not compete on price with imported cheap, industrial-made British cloth that flooded the American market. So American manufacturers, many of them in the northeast, began pressing Congress for protectionist tariffs against British cloth and other manufactures, to give their industries a chance to compete and take root. 

Already from the start, we begin to see the kernel of what would later become known as "American System", a nationalist-protectionist doctrine, what may be regarded as an updated American version of old Mercantilism.  This began as early as Alexander Hamilton in the 1780s.  Hamilton realized that political independence alone was not enough, that the American economy remained dependent on Britain, and envisaged the federal government as a tool to break that dependence.  Hamilton advocated the establishment of the First Bank of the United States to promote US commerce and manufacturing and had already begun promoting protectionist tariffs in 1791.

The first protectionist tariff was passed in 1816  Early activists like Matthew Carey of Pennsylvania, raised protectionism into a major item of the political agenda.  It became part of the platform of Henry Clay's Whigs.  The economics behind it was given theoretical depth by Carey's son Henry C. Carey and the German exile Friedrich List, who provided "infant industry" arguments of a "national system" of protectionism.  It was labeled the "American System" to contrast with the "British System" of Manchester School liberalism.  The retardation of economics in American universities was partly because the best English-language textbooks of the day were based on classical Ricardian economics, peddling "British" free trade doctrines so inimical to the American industrialists who frequently served as university trustees.   Economics was suspect, until Carey-based curricula were developed as alternatives. .

Ranged against the northern protectionists were the plantation lords of the South. They feared retaliatory British tariffs on their cotton exports. Southerners did not accept the Northern argument that a growing American cloth industry could substitute for British markets. British industry was so much larger and more developed than the American equivalent. Being still small and unproductive, American cloth manufacturers could not hope to offer as good a price for Southern cotton as the British manufacturers could, nor could they sell Southern consumers manufactured goods as cheaply as the British did. In Southern calculation, a US-wide tariff would turn the terms of trade against them – what they produced would sell for less, what they consumed would cost more to buy. A protectionist tariff would hit Southern pocketbooks, and hit them hard.

The battle over the tariff was bitterly fought throughout the 19h C. between Northern and Southern representatives in Congress. Northerners demanded protectionism, Southerners demanded free trade. Whenever northerners gained the upper hand in Congress, the federal tariff was pushed upwards. Whenever southerners managed to get in the saddle, the tariff was pulled downwards.

In 1828, Northerners in Congress managed to pass a stiff protectionist tariff – the 'tariff of abominations' as it was known then. It caused a very serious quarrel as Southern states rallied against the tariff. Some Southern states, notably South Carolina, refused to collect the tariff at their ports even threatened to secede from the Union if the issue was pressed ('Nullification Crisis'). This quarrel nearly broke out in civil war, but it was quietly resolved with a compromise tariff in 1833. But it was a dress rehearsal for what was to come.

Between the 1830s and 1850s, the to-and-fro over the tariff continued. Into this configuration entered the new states of the West, conquered in the Mexican-American War of 1848. Realizing that the entry of any new state into the union would tip the mathematical balance between Northern & Southern interests in Congress, Southerners insisted that they become slave states and thus aligned with their interests, while Northern representatives insisted the new states be free soil. Tariff calculations and the slavery question became more intertwined.  American System propagandists, like Horace Greeley, were quick to conjoin them together with the paradoxical slogan that a vote for protectionism was a vote for freedom, while voting for free trade meant voting for slavery.

Things reached an apex with the election of 1860. A new party, the Republican Party, had been formed, which promised three things on its platform: free states in the West, a protectionist tariff and a homestead act (hand out federal land for free to western farmers).  Experienced Southern politicians had defeated tariffs before by means of divide-and-rule politicking and had forced free-slave compromises on new states. But the Republicans were different. They represented a shatter-proof coalition of Northern manufacturing interests (who wanted the tariff) with Western farming interests (who wanted the homestead act). Together, their representatives outnumbered the Southern delegations. Try as they will, Southern politicians failed to drive a wedge between them. The Republican coalition held together.  With the electoral victory of Abraham Lincoln and the Republicans in 1860, the Southern states knew the game was up. The Congressional mathematics were now against them, they could no longer use crafty politics to obstruct the passage of the Northern program. The triumphant Republicans promised the passage of a highly protectionist tariff – the Morrill Tariff – as the first item of the Congressional agenda of 1861. In anticipation, the Southern states, led by South Carolina, promptly seceded from the Union, and the Civil War began.

In a larger sense, the Civil War was not merely a war over slavery or tariffs, but over the nature of the country itself.  Is the United States going to be an industrial or agrarian nation? Self-sufficient or entangled abroad? Is the elite going to be composed of enlightened country gentlemen or arriviste industrialists? Jeffersons or Hamiltons? This debate, this tug-o'-war, had been raging from the start of the nation's birth, long before tariffs or slavery hit the headlines.  It was to be finally decided bloodily  in the battlefields of 1861-65. The Southern states were decisively defeated, and with it, the plantation lords exited history. From 1861 until 1913, the United States maintained a highly protectionist tariff, and the country was gradually weaned off dependency on primary commodities and went through the process of rapid industrialization in the 1870s-1890s. True, Western farmers and their commodities continued to loom large in American economy during these decades, but the country was no longer exclusively agricultural. An industrial and manufacturing base grew, taking an ever larger share. By 1920, the United States was the largest manufacturing nation in the world, producing some 20-25% of the world's industrial output.

With the tariff triumphant, post-Civil War American economics changed color.  The tide of free trade liberalism in Europe in the 1860s reached US shores, but proponents remained a minority. Some free trade advocates were tied up with other controversial causes (e.g. Henry George) .  The bulk of American economists were what we have called "American apologists", suspicious of free trade and competition.   The slogans of the American System - "Protection and Sound Money" - remained the central platform of the Republican Party into the early 20th Century.





Resources on American 19th Century Economics

  • "American Economics", by Prof. Van Buren Denslow, 1884, North American Review, p.12 [moa]

All rights reserved, Gon็alo L. Fonseca


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