Economic Nationalism

Economic Nationalism

The American System advocated industrial, physical, and financial infrastructure, as well as support for public education.

Learning Objectives

Describe Alexander Hamilton’s vision for an “American System”

Key Takeaways

Key Points

  • The American School of Economics, or the ” American System,” as it was referred to by Henry Clay, informed much of the debate over economic policy during the antebellum period.
  • Its central tenets included the support of industry, the creation of a physical and financial infrastructure, government support of public education, and the rejection of class struggle in favor of a harmony of interests.
  • The goal, most forcefully articulated by Hamilton, was to ensure that the United States did not lose political independence by being economically and financially dependent upon the powers and princes of Europe.
  • The American System was supported by New England and the Mid-Atlantic, which had a large manufacturing base. The South, however, opposed the American System.

Key Terms

  • tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
  • protectionism: A policy of keeping the domestic producers of a product safe by imposing tariffs, quotas, or other barriers on imports.
  • mercantilism: An economic theory that holds that the prosperity of a nation depends upon its supply of capital and that the global volume of trade is “unchangeable.”

Economic Self-Sufficiency

The “American System,” a term synonymous with “National System” and “Protective System,” was a system of economics that represented the legacy of Alexander Hamilton, secretary of the treasury under George Washington ‘s presidency. In his “Report on Manufactures,” Hamilton argued that the United States could not become fully independent until it was self-sufficient in all necessary economic products. Hamilton rooted this economic system, in part, in the successive regimes of Colbert’s France and Elizabeth I’s England, while rejecting the harsher aspects of mercantilism. As later defined by Senator Henry Clay, who became known as the “Father of the American System,” the American System unified the nation north to south, east to west, and city to farmer.

Frank Bourgin’s 1989 study of the Constitutional Convention shows that the founders of the country intended for the government to have direct involvement in the economy. This had much to do with the perceived need to overcome the economic and financial chaos the nation suffered under the Articles of Confederation. The goal, most forcefully articulated by Hamilton, was to ensure that the United States did not lose political independence by being economically and financially dependent upon the powers of Europe. The creation of a strong central government able to promote science, invention, industry, and commerce was seen as an essential means of promoting the general welfare and making the economy of the United States strong enough to allow the nation to determine its own destiny.

Antebellum Programs

A number of programs undertaken by the federal government in the period prior to the Civil War gave shape and substance to the American System. These programs included the establishment of the Patent Office in 1802; the creation of the Coast and Geodetic Survey in 1807; other measures to improve river and harbor navigation created by the 1824 Rivers and Harbors Act; and the various army expeditions to the west, beginning with Lewis and Clark’s Corps of Discovery in 1804 and continuing into the 1870s. Western expeditions were almost always under the direction of an officer from the Army Corps of Topographical Engineers, which provided crucial information for the overland pioneers that followed. Other programs included the assignment of army engineer officers to assist or direct the surveying and construction of early railroads and canals; the establishment of the First and Second Banks of the United States; and various protectionist measures such as the Tariff of 1828.

American System Policies

The name “American System” was coined by Henry Clay of the Whig Party to distinguish the school of thought from the competing theory of economics at the time, the British System, represented by Adam Smith in his work An Inquiry into the Nature and Causes of the Wealth of Nations.

The American System was comprised of the three following cardinal policy points:

  • Support industry: Advocated for protectionism and opposition to free trade, particularly for the protection of “infant industries” and those facing import competition from abroad; policy examples include the Tariff of 1816 and the Morrill Tariff.
  • Create physical infrastructure: Provided government finance of internal improvements to speed commerce and develop industry, which involved the regulation of privately held infrastructure to ensure that it met the nation’s needs; policy examples include Cumberland Road and Union Pacific Railroad.
  • Create financial infrastructure: Established a government-sponsored National Bank to issue currency and encourage commerce, which involved the use of sovereign powers for the regulation of credit to encourage the development of the economy and deter speculation; policy examples include the First Bank of the United States, the Second Bank of the United States, and the National Banking Act.

The American System economic philosophy also included 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. In addition, it was characterized by a rejection of class struggle in favor of the “harmony of interests” between owners and workers, farmers and manufacturers, and the wealthy and working classes.

Advocacy

The American System was supported by New England and the Mid-Atlantic; these states had a large manufacturing base, and the System protected their new factories from foreign competition. The South, however, opposed the American System. Plantation owners were heavily reliant on production of cotton for export, and the American System produced lower demand for their cotton and higher costs for manufactured goods. After 1828, the United States kept tariffs low until the election of Abraham Lincoln in 1861.

Portrait of Henry Clay

Henry Clay: Henry Clay is considered the Father of the American System of economics.

The Second Bank of the United States

The Second Bank of the United States functioned from 1816 until 1836, when it came under attack by Jacksonian Democrats.

Learning Objectives

Describe the reasons behind both the Second Bank’s creation and its dismantling

Key Takeaways

Key Points

  • The Second Bank of the United States was chartered in 1816 as a means for the federal government to regulate finance throughout the country.
  • It existed for roughly 20 years before coming under attack by Jacksonian Democrats and going bankrupt.
  • Jackson’s dislike of the bank came from its high levels of fraud and corruption and Jackson’s personal hostilities toward the banking system.

Key Terms

  • pet banks: A pejorative term for state banks selected by the U.S. Department of Treasury to receive surplus government funds in 1833.
  • Panic of 1819: The first major financial crisis in the United States, which occurred during the political calm of the “Era of Good Feelings.”
  • economic bubble: A condition of “trade in high volumes at prices that are considerably at variance with intrinsic values”; a trade in products or assets with inflated values.

Introduction

The Second Bank of the United States was chartered in 1816, five years after the First Bank of the United States lost its own charter. The predominant reason that the Second Bank of the United States was chartered was because the United States had experienced severe inflation and was having difficulty financing military operations during the War of 1812. Subsequently, the credit and borrowing statuses of the United States were at their lowest levels since its founding.

The Creation of the Bank

The Second Bank of the United States, like the First Bank before it, was created as part of the American System of economics. One of the policies of the American System was to create financial infrastructure in the form of a government sponsored National Bank to issue currency 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.

The Second Bank provided a means for the government to regulate financial affairs. The bank was created when President James Madison and Secretary of the Treasury Albert Gallatin found that the government was unable to finance the country in the aftermath of the War of 1812, which placed the United States in significant debt. The debt of the nation led to an increase in banknotes among private banks, and as a result, inflation increased greatly. For these reasons, Madison and Congress agreed to form the Second Bank of the United States.

After the war, and despite its debt, the United States experienced an economic boom due to the devastation of the Napoleonic Wars. In particular, the U.S. agricultural sector underwent great expansion, in part because of the damage to Europe’s agricultural sector. The bank aided this boom through its lending, which encouraged speculation in land. This lending allowed almost anyone to borrow money and speculate in land, sometimes doubling or even tripling the prices of land. The land sales for 1819 alone totaled some 55 million acres. With such a boom, hardly anyone noticed the widespread fraud occurring at the bank as well as the economic bubble that had been created.

Panic of 1819 and McCulloch v. Maryland  

In the summer of 1818, the national bank managers realized the bank’s massive overextension and instituted a policy of contraction and the calling in of loans. This recalling of loans at once curtailed land sales and slowed the U.S. production boom, which occurred simultaneously with the recovery of Europe. The result was the Panic of 1819 and the situation leading up to McCulloch v. Maryland (1819).

During this time, Maryland adopted a policy to restrict banks by placing a tax on any bank that was not chartered by the state legislature. This tax was either 2 percent of all assets or a flat rate of $30,000. This meant that the Baltimore branch of the Second Bank of the United States would have to pay this hefty tax. The State filed suit against McCulloch, the representative of the bank, in a county court. The case made its way through the courts, all the way up to the U.S. Supreme Court, where the tax by the state of Maryland was ultimately struck down.

The Bank’s Decline

By the early 1830s, President Andrew Jackson had come to thoroughly dislike the Second Bank of the United States because of its fraud and corruption. Apart from a general hostility toward the banking system and a belief that specie (“hard” money of gold or silver) was the only true money, Jackson’s reasons for opposing the renewal of the charter revolved around his belief that bestowing special privileges (such as government sponsorship) on banks was the cause of inflation and other perceived evils. As a result of his beliefs, Jackson is considered primarily responsible for the Bank’s demise.

The Second Bank of the United States thrived on tax revenue that the federal government regularly deposited. Jackson struck at this vital source of funds in 1833 by instructing his Secretary of the Treasury to deposit federal tax revenues in state banks, soon nicknamed “pet banks” because of their loyalty to Jackson’s party.

In September of 1833, Secretary of the Treasury Roger B. Taney transferred the government’s Pennsylvania deposits in the Second Bank of the United States to the Bank of Girard in Philadelphia. The Second Bank of the United States soon began to lose money. Nicholas Biddle, desperate to save his bank, called in all of his loans and closed the bank to new loans. This angered many of the bank’s clients, causing them to pressure Biddle to readopt its previous loan policy. This then triggered Biddle’s Panic.

Some Anti-Jacksonians converted their outrage into political action. Under guidance from Webster and Clay, they formed the Whig Party in 1833. The Whigs and anti-Jackson National Republicans hoped they would gain enough seats in Congress during the election of 1836 to override a second Jackson veto, thereby extending the Bank’s charter. However, their strategy was not successful, and their coalition still lacked the necessary majority in Congress following the election to extend the Bank’s charter. In 1836, the Bank’s charter was allowed to expire. It attempted to continue as a standard bank, but failed five years later.

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Second Bank of the United States—south facade: The south facade of the building that housed the Second Bank of the United States is located at 4th and Chestnut Streets in Independence National Historical Park, Philadelphia, Pennsylvania.

Protective Tariffs

During the early years of the United States, protective tariffs were put in place to aid the new nation’s economy; however, the taxes caused tension in the South.

Learning Objectives

Discuss the history of tariffs from their inception in 1789 until the Nullification Crisis of 1832

Key Takeaways

Key Points

  • Many founders of the early republic perceived protectionism to be a necessary federal instrument promoting national economic self-sufficiency per the American System of economics.
  • In his “Report on Manufactures,” Alexander Hamilton proposed a far-reaching plan to use protective tariffs as a lever for rapid industrialization.
  • The high protectionist tariffs Hamilton originally called for were not adopted until after the War of 1812, when nationalists such as Henry Clay and John C. Calhoun saw the need for more federal income and industry.
  • However, when a highly protective tariff was established in 1828 to promote the industry of northern manufacturers, many Southerners felt it unfairly targeted their agricultural-based economic system.
  • In November of 1832, South Carolina adopted an ordinance of nullification and declared that the tariffs of both 1828 and 1832 were unconstitutional and unenforceable in South Carolina.
  • While the Nullification Crisis was resolved in early 1833, it is considered a precursor to the sectional crisis that would become the Civil War.

Key Terms

  • Nullification Crisis: A sectional event—occurring during the presidency of Andrew Jackson—that was created by South Carolina’s 1832 ordinance against the Tariff of 1828.
  • protectionism: A policy of keeping the domestic producers of a product safe by imposing tariffs, quotas, or other barriers on imports.
  • Tariff of Abominations: A term Southerners used for a tax passed in 1828 that protected industry in the northern United States.

Tariffs in the Early National Period, 1789–1828

The Tariff Act of 1789 provided the first national source of revenue for the United States. The U.S. Constitution, ratified in 1789, allowed only the federal government to levy uniform tariffs. The Tariff Act taxed all imports at rates from 5 to 15 percent. These rates were primarily designed to generate revenue to pay for the federal government’s activities and the debts accumulated by the federal and state governments during the Revolutionary War. Alexander Hamilton, the first secretary of the treasury under President George Washington, believed that all Revolutionary War debt should be paid in full to establish U.S. financial credibility.

The Role of Protective Tariffs

In his “Report on Manufactures,” Hamilton proposed a far-reaching plan to use protective tariffs as a lever for rapid industrialization. The industrial age was just starting, and the United States had little or no textile industry, which was the keystone of early industrial societies. The British government tried to maintain their near monopoly on cheap and efficient textile manufacturing by prohibiting the export of textile machines, machine models, or the emigration of people familiar with these machines. Cloth in the early United States was nearly all hand made, which was a time-consuming and expensive process, whereas the new textile manufacturing techniques in Britain were often more than 30 times cheaper. Hamilton believed that a stiff tariff on imports would not only raise income but also “protect” and help subsidize early efforts at setting up manufacturing facilities that could compete with British products.

The high protectionist tariffs Hamilton originally called for were not adopted until after the War of 1812, when nationalists such as Henry Clay and John C. Calhoun saw the need for more federal income and industry. In wartime, they declared, having a home industry was a necessity to avoid shortages. Likewise, small new factories were springing up in the northeast to mass produce boots, hats, candles, nails, and other common items, and the owners of these factories wanted higher tariffs that would protect them—at least for a time—from more efficient British producers. When the Act was passed, it included a provision that allowed for a 10 percent discount on all items imported on American ships. This was done to ensure that American merchant marines would not financially suffer.

Once industrialization and mass production started, manufacturers and factory workers demanded higher tariffs. They believed their businesses should be protected from the lower wages and more efficient factories of Britain and the rest of Europe. Nearly every northern Congressman was eager to adopt a higher tariff rate for his local industry. Senator Daniel Webster, formerly a spokesperson for Boston’s merchants who imported goods (and wanted low tariffs), switched dramatically to represent the manufacturing interests in the Tariff of 1824. Rates were especially high for bolts of cloth and for bar iron, of which Britain was a low-cost producer.

Controversy

The tariffs raised questions, however, about how power should be distributed, causing a fiery debate between those who supported states’ rights and those who supported the expanded power of the federal government. John C. Calhoun expressed the views of many Southerners that protective tariffs unjustly favored Northern commercial interests and Western agrarian interests at the expense of Southern producers. The North had an expanding manufacturing base while the South did not; therefore, the South imported far more manufactured goods than the North, causing such tariffs to fall most heavily on the Southern states.

Portrait of John C. Calhoun

John C. Calhoun: John C. Calhoun expressed the views of many Southerners that protective tariffs unjustly favored Northern commercial interests and Western agrarian interests at the expense of Southern producers.

The Tariff of 1828

The culmination came with the Tariff of 1828, ridiculed by free traders as the “Tariff of Abominations,” with import custom duties averaging more than 25 percent. Intense political opposition to higher tariffs came from Southern Democrats and plantation owners in South Carolina who had almost no manufacturing industry and imported many products with high tariffs. They would have to pay more for imports while getting less for the cotton they sold abroad. They claimed their economic interest was being unfairly injured.

Faced with a reduced market for goods and pressured by British abolitionists, the British reduced their imports of cotton from the United States, which weakened the Southern economy even more. The tariff forced the South to buy manufactured goods from U.S. manufacturers, mainly in the North and at a higher price, while Southern states also faced a reduced income from lost sales of raw materials.

Nullification Crisis

John C. Calhoun strongly opposed the tariff and urged nullification of the tariff within South Carolina. On July 14, 1832, President Andrew Jackson signed into law the Tariff of 1832, which made some reductions in tariff rates. However, the reductions were too little for South Carolina, and in November of 1832, the state adopted an ordinance of nullification and declared that the tariffs of both 1828 and 1832 were unconstitutional and unenforceable in South Carolina.

The passing of the ordinance, which later became known as the Nullification Crisis, also sparked early discussions of secession from the Union among radical factions. While the Nullification Crisis would be resolved in early 1833, tariff policy would continue to be a national political issue between the Democratic Party and the newly emerged Whig Party for the next 20 years. The Nullification Crisis is also considered a precursor to the sectional crisis that would become the Civil War.