The American System of Economics

What Is The American System of Economics?

With roots dating back to George Washington and his Secretary of the Treasury Alexander Hamilton, the American System, also called the American School of economics, is the economic philosophy that guided U.S. national economic policy from the earliest days of the Republic, through the Civil War to the early 1970s, and built the United States from an agrarian frontier society to the world's largest economy and the greatest industrial power.

The American System of economics consists of three basic tenets for government to follow:
1. Promote domestic industry through high import duties, or tariffs, on selected imports and/or subsidies for domestic producers;
2. Invest in a public infrastructure (roads, ports, dams, irrigation and water projects, public schools and scientific research) to facilitate commerce and fuel private enterprise; and,
3. Create a national bank to oversee national monetary policy and regulate credit to spur economic development and deter speculation.

Alexander Hamilton first proposed the American System. Hamilton's Report on Manufactures, requested by President Washington, laid out a plan for the federal government to nurture the growth of domestic manufacturing industries in the United States instead of having the new nation depend on manufactured goods imported from abroad. 

In his report in 1791 Hamilton wrote: "The wealth...independence and security of a Country, appear to be materially connected with the prosperity of manufactures. Every nation ought to endeavor to possess within itself all the essentials of national supply." 

The American System stood in contrast to the “free trade” policies advocated by the British Empire. 

Thomas Jefferson was Hamilton’s archenemy and initially opposed his rival’s economic plan but after the British burned the White House in the War of 1812 he had a change of heart. He wrote: "...experience has now taught me that manufactures are now as necessary to our independence as to our comfort..." and "The prohibiting duties we lay on all articles of foreign manufacture which prudence requires us to establish at home, with the patriotic determination of every good citizen to use no foreign article which can be made within ourselves without regard to difference of price, secures us against a relapse into foreign dependency." 

This American System was embraced by the Whigs (they would later become the Republican Party).  The most famous and influential of the Whigs was Senator Henry Clay of Kentucky, who wrote: "Poverty befalls any nation that neglects and abandons the care of its own industry, leaving it exposed to the action of foreign powers--there is a remedy and that consists in --adopting a Genuine American System accomplished by the establishment of a tariff--with the view of promoting American industry--the cause is the cause of the country, and it must and it will prevail." 

Abraham Lincoln was a staunch advocate of the American System.  Lincoln said: "Give me a tariff and I will give you the greatest nation on earth." and: "Abandonment of the protective policy by the American Government must result in the increase of both useless labour, and idleness [unemployment]; and so, in proportion must produce want and ruin among our people."

Republican president Teddy Roosevelt famously said, “Thank God I am not a free trader.” 

The Republican Party platform 1972 said: 'We deplore the practice of locating plants in foreign countries solely to take advantage of low wage rates in order to produce goods primarily for sale in the United States. We will take action to discourage such unfair and disruptive practices that result in the loss of American jobs.'"

But the United States government, under both Democratic and Republican administrations, abandoned the American System, the economic policy that made us the greatest industrial power on earth. We began demolishing many trade barriers under the flag of “free trade.”  This coincided with the collapse of domestic industries, the stagnation of working peoples' wages, and an explosion of the trade deficit as the US imported more and more goods that had been produced domestically.  The losses of revenues from domestic industries, now bankrupt, and from payroll taxes on the wages of workers now unemployed, created yawning budget deficits at the municipal, state and federal levels.