American School

References

• American School of Economics Wikipedia Article

Notes

The American School, also known as the National System, represents three different yet related constructs in politics, policy, and philosophy. The policy existed from the 1790s to the 1970s, waxing and waning in actual degrees and details of implementation. Historian Michael Lind describes it as a coherent applied economic philosophy and conceptual relationship with other ideas.

• It was the macroeconomic philosophy, similar to Mercantilism, that dominated the United States national policies from the time of the American Civil War until the mid-20th century. It can be seen as contrary to classical economics, and consisted of three core policies:

1. Protecting industry though selective high tariffs (especially 1861-1932) and through subsidies (especially 1932-1970)
2. Government investments in infrastructure targeted internal improvements (especially in transportation)
3. A national bank with policies that promote the growth of productive enterprises rather than speculation.

• The American School's key elements were promoted by John Quincy Adams and the National Republican party, Henry Clay and the Whig Party, and Abraham Lincoln and the early Republic Party.

History

Origins

• The American School of Economics represented the legacy of Alexander Hamilton, who in his Report on Manufacturers, argues that the U.S. could not become fully independent until it was self-sufficient in all necessary economic products.
• Hamilton rooted the economic system in the successive regimes of Colbert's France and Elizabeth I's England, while rejecting the harsher aspects of mercantilism, such as colonialism.
• Henry Clay became known as the Father of the American System because of his support of the system laid out by Hamilton.
• Frank Bourgin's 1989 study of the Constitutional Convention shows that direct involvement by the government in the economy was intended by the founders in order to promote the general welfare and avoid being reliant on Europe, so that the economy of America could be strong enough to determine its own destiny.
• Jefferson and Madison opposed Hamilton's ideas.
• Programs by the federal government prior to the Civil war gave shape to the American System:
• • Establishment of the Patent Office in 1802
  • United States Coast and geodetic Survey in 1807
  • Rivers and Harbors Act of 1824
  • The Establishment of the First Bank of the United States
  • Tariff of 1828
  • Various Army Expeditions to the West, including Lewis and Clark's Corps of Discovery in 1804
• Leading proponents of the system were Fredrich List (1789-1846) and Henry Carvey (1793-1879).
• • List was a 19th century German and American economist who called in the National System and developed it further in his book the The National System of Political Economy. Harvey 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.

Central Policy

• The system had three cardinal policy points:

1. 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.
2. Create physical infrastructure: government finance of internal improvements to speed commerce and develop industry. This involved regulation of privately held infrastructure, to ensure that it meets the nation's needs.
3. Create financial infrastructure: a government sponsored National Bank to issue 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.

• Henry Carvey, a leading American economist and advisor to Abraham Lincoln, in Harmony of Interests, displays two additional points of the American School that distinguishes it from the systems of Adam Smith and Karl Marx:

1. 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.
2. Rejection of class struggle, in favor of Harmony of Interests between: owners and workers, farmers and manufacturers, the wealthy class and the working class.

• Carvey wrote the following in The Harmony of Interests, concerning the difference between the American System and the British System of economics:

Two systems are before the world; ... One looks to increasing the necessity for 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 been associated with the American School from the 1830s onwards. We were on the gold standard throughout the 1800s, though Henry Carey suggested moving partly away from this during the Civil War.

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.
• 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.
• The American system was supported by New England and Mid-Atlantic, which had a large manufacturing base. 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.

Executive Opposition to the American System by the Jacksonians

• Opposition came mainly from the Democratic party of Andrew Jackson, Martin van Buren, and James K Polk. These three presidents styled themselves as peoples; politicians, seeking to protect both the agrarian farmer and the strength of the Union. Jackson proclaimed that the first principle of our system is that the majority govern.
• The Jacksonian presidents saw key tenets of the American System, including the support for the Second Bank of the Unites States and the advocacy of protectionist tariffs, as serving moneyed or special interests rather than the majority of Americans. These presidents were against government investment in public works, seeing it as a form of government overreach.

Second Bank of the United States and the Bank War

• Jackson was against the renewal of the charter of the Second Bank of the United States in 1829, arguing that it failed to establish a uniform and sound currency and that the bank served privileged, moneyed interests.
• Nicholas Biddle and Henry Clay managed to pass the renewal of the charter by opening new branches of the bank in key political districts - manipulating Congressional opinion.

Tariff Question

• The tariff question was tricky for Jackson in that it benefited the north and was a detriment to the import-dependent South.
• Both Jackson and Polk ended up lowering tariffs, despite objections from the North.

Opposition to Government-Financed Internal Improvements

• Jacksonians opposed government investment in public works, keeping faith with the tenets of Jeffersonian republicanism, notably its agrarianism and strict constitutionalism.

Implementation

• Due to Jacksonian opposition, the American School was not embraced as the economic philosophy of the United States until the election of Abraham Lincoln in 1860, who was able to fully implement what Hamilton, Clay, List, and Carey theorized.
• The United States continued these policies throughout the later half of the 19th century.

Evolution

• The American System continued until 1913 when 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. A subsequent further return was enacted as President Herbert Hoover responded to the 1929 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.

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 subsidize 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 US 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 the American economic system.

Other Nations

Fredrich 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 as well as recent policies in India.