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By James Pew
“Give us a protective tariff, and we will have the greatest nation on earth.” — Abraham Lincoln, 1847 (the first president of the United States to implement Alexander Hamilton’s American System of political economy).
Alexander Hamilton was an American Founding Father who served as the first Secretary of the Treasury under President George Washington (1789–1797). In what would become one of the most influential documents in American economic history, Hamilton wrote and submitted to Congress his Report on Manufactures on December 5, 1791. It was the third of his three major reports, following the Report on Public Credit (1790) and the Report on a National Bank (1790).
Hamilton argued that the United States needed to develop a strong manufacturing sector rather than remain an agrarian economy — countervailing the Jeffersonian vision. His plan included protective tariffs, bounties and premiums to encourage industry, as well as an active role for the federal government in guiding economic development.
However, at the time Congress failed to act on Hamilton’s recommendations, as the dominant faction increasingly organized around Jefferson and Madison favored:
An agrarian republic of independent farmers as the ideal social model.
Free trade, drawing on Adam Smith’s arguments that nations benefit from specializing in what they do naturally well — and America’s natural advantage was agriculture.
Limited federal government with a narrow reading of its constitutional powers.
Hostility to the financial and manufacturing classes that Hamilton’s system would have empowered.
Hamilton’s vision was, among other things, a repudiation of the free trade policies of Adam Smith embraced in the Jeffersonian framework. It would be resurrected decades later by Henry Clay, following the War of 1812 when the British sought to destroy American industry by “dumping” into the colonies loads of British manufactured items at or below cost. As Speaker of the House under President James Monroe, Clay gave a landmark speech to Congress during the debates of the Tariff of 1824 which formally articulated the American System as a coherent program and coined the term itself.
“Clay listed the three planks of the American System as protective tariffs, a national bank, and internal improvements.”1 :
The American System
Protective tariffs to develop domestic industry.
A national bank to stabilize currency and credit.
Internal improvements (infrastructure: roads, canals, railways) funded by the federal government.
It’s worth noting that the debate between Hamilton and Jefferson was happening in the very earliest years of the republic, when fundamental questions about what kind of nation America would be were still wide open. Also worth noting, that Hamilton’s Report on Manufactures came just 15 years after independence in 1791. Clay’s American System came about 33 years after independence, and Lincoln’s implementation of it came 85 years after independence. So the Hamiltonian vision took nearly a century to be fully realized. The following sub-sections provide a relevant, and brief summary of America’s economic history.
British Mercantilism in the pre-Independence American Colonies
“...Hamilton, drew on the tradition of mercantilism, which dominated British practice before its unilateral adoption of free trade in the 1840s, when its industrial supremacy was secure.”2
Mercantilism fits into a broader category called developmental cconomics. Economic Historian Michael Lind sees it as “an early-modern European variant of developmentalism.” A developmental state can be either democratic or authoritarian. Its key feature is that it holds the view of “private and public sectors as collaborators in a single national project of maximizing the military security and well-being of the community by means of technological modernization, while minimizing dependence on other political communities.” Or otherwise put, “the basic unit of the world economy is not the individual or the firm, but the polity.”3
Britain’s policy of mercantilism concerning the American colonies included a planned economy which divided labour in such a way that “British manufacturers sold finished products to a captive market of consumers in the American colonies, Ireland, and India, which in return exported raw materials and food to the British Isles.”4 Britain’s developmentalist policy made it oppositionally hostile to the manufacturing aspirations of those in the colonies who were only permitted to export raw materials. In time citizens sought and won their independence — an industrial base of manufacturing and large government funded high-tech infrastructure projects could not have been developed otherwise.
These are the economic roots of America and provide the context which illustrate how ahead of his time, the visionary, even somewhat prophetic Alexander Hamilton was. The agrarian and mercantile subordinate mindset among colonists had long set in, but Hamilton knew that a powerful nation capable of defending its sovereignty could not develop on agriculture alone.
The Three American Republics
As noted, during the early years of the American republic, the heart of Jeffersonian political economy was the view that agriculture was the foundation of national wealth. On the contrary, Hamilton’s vision foresaw the effects of technological advancement which would lead to increasing efficiency and productivity and create surpluses of wealth greatly exceeding that which had ever been maximally achieved in the most well-managed agrarian societies. As Lind lays out in his history of the American economy, Land of Promise, technological advancement, often in the form of groundbreaking inventions, drove the economic evolution of America, its eventual transition from agrarian to industrial, leading to an abundant prosperity the likes of which the world had never before witnessed.
From Michael Lind’s Land of Promise:
“Some economic historians have distinguished as many as five major waves of technological change since the industrial era began. Many identify three, based on radically new ‘general purpose technologies’: the first industrial revolution of the late 1700s, based on the steam engine; the second industrial revolution of the late nineteenth century, based on electricity, automobiles, and science-based chemical industries; and the third industrial revolution of the mid- and late twentieth century, based on the computer.”
In addition, Lind explains how students of American political economy believe that “the United States has gone through two or three regimes or informal ‘republics’.” His own categorization of these republics is as follows: “(1) the American Revolution and its aftermath, (2) the Civil War and Reconstruction, and (3) the Great Depression and World War II.”5
Each of these “republics” originated in a “prolonged crisis” of technological innovation/disruption. Normally however, there is a delay of one or two generations from the invention of a new technology, to its “widespread adoption in ways that revolutionize the economy and society.” Britain developed the steam engine in the late 1770s (“American Revolution republic”), but it didn’t significantly impact American society until the 1830s. The “second industrial revolution” of the 1860s and 1870s (“Civil War republic”) saw the development of “electricity, telephony, and the internal combustion engine.” But these technologies were not rolled out meaningfully until the early twentieth century, and “achieved their full potential only after 1945.” And while digital technology of the information revolution (the third industrial revolution) was initially developed in the 1940s and 1950s (“Great Depression/WWII republic”), “widespread adoption of computer technology had to wait until the 1980s and 1990s…”6
Each of these periods of industrial advancement and economic boom driven by ground-breaking technology prove right many of the fundamental tenets of Hamiltonianism. Namely, that investment in technology and infrastructure unleashes the manufacturing/industrial potential which leads to efficiencies, greatly increased productivity, and a resultant prosperity far greater than what can be achieved under only pre-industrial agrarian conditions.
The following subsections examine two remarkably productive “mini epochs.” The first lasted 30 years and was known as The Gilded Age. The second, known as the Golden Age, lasted only 25 years.
The Steam-Powered Gilded Age (1870–1900)
The Gilded Age of explosive prosperity begins after the Civil War and President Lincoln’s assassination. In recent years, President Trump remarked that “Abraham Lincoln warned that abandoning the policies that protect American industry would ‘produce want and ruin among our people.’ ” Lincoln himself, and every post-Lincoln Gilded Age president implemented Hamiltonian principles:
Ulysses S. Grant (1869–1877) — supported high tariffs and hard money.
Rutherford B. Hayes (1877–1881) — Republican, high tariff supporter.
James Garfield (1881) — strong protectionist.
Chester Arthur (1881–1885) — Republican, though he surprisingly supported some tariff reform.
Benjamin Harrison (1889–1893) — signed the highly protectionist McKinley Tariff.
William McKinley (1897–1901) — the last great champion of protective tariffs in the Hamiltonian tradition.
Thanks to the consistent application of the American System, during America’s Gilded Age real wages increased by 53 percent, all while prices fell by 58 percent.7 William McKinley, the last of the Gilded Age presidents, made an illustrative comment regarding the economic success of this remarkable period in American economic development: “We lead all nations in agriculture; we lead all nations in mining; we lead all nations in manufacturing. These are the trophies which we bring after twenty-nine years of a protective tariff.”
The Internal Combusting and Electrified Golden Age (1945–1970)
From the end of WWII to the early 1970s, America’s “Golden Age,” per capita personal income grew nearly twofold, while employment rose by 75 percent and real GDP increased by 169 percent.8
But it was the Democrat President Roosevelt’s New Deal (1933-1939) that animated elite thinking during the Golden Age, however, unlike many mainstream economists who saw the New Deal as simply liberal reform, Lind sees it as a continuation of the American System, following in the tradition of Hamilton, Clay, and Lincoln.
Republican President Richard Nixon, as discussed in my last essay on this topic, The American System vs. The Rules Based Order, was the last American president before Trump to implement Hamiltonian principles. He also supported the New Deal, which continued uninterrupted until Democrat President Jimmy Carter’s administration began to dissemble it through deregulation.
It is worth highlighting that both the Gilded and Golden ages of Hamiltonian political economy represent the two periods in American history where prosperity was at its most abundant. However, an important distinction should be made. That is, the prosperity of the Gilded Age was concentrated mostly in a few industrial elites, who Mark Twain referred to as “Robber Barrens,” in his satirical novel The Gilded Age: A Tale of Today co-authored in 1873 with his friend and neighbour Charles Dudley Warner. By contrast, the prosperity of the Golden Age was more fairly distributed.
Sandwiched in between these two paragonal epochs of economic flourishing, was the Progressive Era of antitrust, regulation, and early labor protections — very much a reaction to the inequalities of the Gilded Age. However, the subsequent transitional period of WWI, the Great Depression, and WWII essentially teed up the boom that allowed America to implement its American Hegemony Strategy (discussed in my previous essay) which created the conditions for the so-called post-WWII rules based order.
Interestingly, the Golden Age was built on a foundation that combined both Hamiltonian industrial policy and Keynesian demand management — a synthesis neither Hamilton nor Jefferson could have anticipated (but which is beyond the scope of the present essay).
While I don’t yet have a clear pathway as to what the topic of the next essay will be, or how many essays I am going to write on the subject of the American System of political economy, I have made it a goal to at least write one more which defines the American System in more detail and examines more closely the nuts and bolts of it. As well, I will definitely be writing an essay or several which compares the history of Canadian developmentalism and Canadian political economy, to America’s history which oscillated between Hamiltonian and Jeffersonian principles.
Thanks for reading. There are two other essays on this topic from this author. The first is Canada Recedes While America Booms, and the second is The American System vs. The Rules Based Order.
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Land of Promise by Michael Lind (Pg 12)
Land of Promise by Michael Lind (Pg 13)
Land of Promise by Michael Lind (Pg 23)
Land of Promise by Michael Lind (Pg 5)
Land of Promise by Michael Lind (Pg 6)
I remember this time, as I am a Baby Boomer.
“From the end of WWII to the early 1970s, America’s ‘Golden Age,’ per capita personal income grew nearly twofold, while employment rose by 75 percent and real GDP increased by 169 percent.”
My parents had a maid who made enough to buy a house in Toronto and a cottage on Lake Simcoe. Everyone had a chance to succeed.
I would appreciate a correction if need be:
Was not the Hamiltonian banking system rightfully put down by twice elected as POTUS General Andrew Jackson?
According to some historians, Hamilton set up the English banking collective that was extracting more than it should have from the early U.S. And that war hero Jackson managed to drive this exploitative money cartel away from the early administration.