The American System: The Economic Genius of Abraham Lincoln
I went to see the film Lincoln at a small theater in a rural area of Missouri.  At several points there was loud applause as the film's recalcitrant Democrats were browbeaten, bribed and shamed into supporting an end to slavery. No moment got more chuckles and cheers than when one of the Republican senators bemoaned the necessity of lowering himself to the point of actually speaking to a Democrat.

Clearly, the Republicans in the audience were excited to see their party so elevated in the film. Amused to see Democrats so clearly in the wrong. Proud to see their team taking tough positions in a noble cause.

As well they should be. President Lincoln's political maneuvering to pass the thirteenth amendment was praiseworthy. Is praiseworthy. Even if the Republican Party later abandoned minority voters in a moment of chilly realpolitik, the party's efforts and the president's sagacity still shine brightly 150 years later.

So brightly, in fact, that it's often difficult to see other aspects of the administration that had a tremendous impact on the United States: like an economic system that would define the nation and set the pace for the world over the next 100 years.

The party name on the ballot might have changed, but economically Lincoln defined himself as a "Henry Clay Whig," putting himself squarely on a line that extended back to his fellow Kentuckian, and from Clay back to Alexander Hamilton and the nation's founders.

From the beginning it was clear that the government would need to be "hands-on" when it came to the economy. Under the Articles of Confederation, economic policy had been mostly left to the states, and the result had been lax regulation that trended toward the British System—what we today would call simply "free trade." Rather than fostering growth, the result had been a disaster, an utter chaos of uncontrolled speculation. As the nation crafted a new constitution, the federal government's ability to intervene in trade wasn't just a minor matter of economic policy, it was regarded as central to the nation's defense. Hamilton was not alone in worrying that the freedom won on the battlefield could be just as quickly lost through economic dependence on foreign powers.

It wasn't that the founders wanted a statist economy in which the government was the owner and the driver of most industry. What they wanted was more of a referee. A powerful referee. They wanted—needed—a government empowered to shape economic policy in a variety of ways. So that's what they made. The Commerce Clause may often be applied to other areas (notably in support of civil rights) but its primary reason for existence is just what the name implies, to allow the federal government broad control over the way the nation does business.

Hamilton's position—the position that developed and grew during George Washington's administration—was that the government should be at the center of three main areas of the economy.

First, the government should protect and support domestic industry. This included the use of both tariffs and subsidies to boost sales of US goods over imports. These tariffs were put in place, not in ignorance of the tenets of free trade, but in direct opposition to that idea. Hamilton and the other founders were well aware of the work of Adam Smith, and of the strength of the "British System" of free trade mercantilism. However, the pre-revolutionary period, along with the messy time spent under the Articles of Confederation, had given them a good sense of what it was like to be the raw material supplier to an industrial power. If America was going to develop its own centers of industry and compete on the world stage, it would need to grow a broad manufacturing base and a strong middle class. It would do that under the umbrella of protectionism.

Second, the government should define the structure and nature of the nation's fiscal infrastructure, not as a means to foster speculation, but as a way of providing stability and investment. In the first half century of the nation, this meant twice chartering a national bank that was privately-owned but acted to support government policy. That bank would also help to set the value of a single, national currency, consolidate the debts of the individual states, and provide a means for the government to secure loans and issue bonds. Anyone who thinks that the recent bank bailouts represent an unprecedented involvement of the US government in finance needs to take a long look at the deal that Washington and Hamilton engineered. They not only created a bank, but used that bank to provide a loan which the government used to fund both itself and the bank. They also insisted on the ability of the government to set taxes and fees, both to raise funds and steer economic development. Under this theory, the nation also created a patent office, port authorities, and other federal agencies charged with regulating business.

Third, the government should support the development of physical infrastructure. This included projects such as the first "interstate highway," the Cumberland Road, and additional public / private partnerships that built out the nation's network of roads, canals, ports, and eventually parks and railways. The purpose of these investments wasn't just to lay miles of road and provide employment, but to bind the nation together and make it easier for the agriculture products of the "West" (today's Midwest) to reach growing industrial areas in the East.

By 1818, Congressman (and also once-and-future Senator) Henry Clay had given this set of philosophies a name. He called it "the American System."

Despite the name, this system didn't have a monopoly on US policy through the first American century. Both the tariffs and the regulation of the fiscal environment were opposed by those who recognized (rightly) that these tools tended to prevent the concentration of wealth. The development of interstate infrastructure was opposed by presidents ranging from Jefferson (who, despite signing the bill to create the National Road, worried that this activity might be both unconstitutional and at odds with his vision for the nation) to Jackson (who really, really, did not like Henry Clay, for one really, really, good reason). The result was that over the course of the years between Washington and Lincoln, support for the American System rose and fell.  

Lincoln came in at a time when that system was at a low ebb. The two previous presidents, Franklin Pierce and James Buchanan, were both Democrats, and both opponents of the American System. The nation Lincoln inherited was deeply in debt, with outdated infrastructure and a wobbly economy. That was all about to change.  

Though he’s rightly remembered for the work he did in elevating a bloody, ugly war into a debate over the meaning of freedom and equality, Lincoln’s idea of equality went far beyond a person’s standing in the courts. Lincoln believed in equality of economic opportunity. At the same time as he was dealing with the war and the issue of slavery, Lincoln’s administration roared into office with the strongest support to date of Clay’s American System. The Lincoln Revolution was meant to return the government to the position that Lincoln and his advisors saw as the original intent of the constitution–by deeply involving the government in growing, supporting, and regulating the nation’s economy.

Lincoln swept in new protective tariffs to shelter American industry and contracted with American manufacturers both for the execution of the war and for massive internal improvements, including the transcontinental railroad. Land grant colleges? Lincoln. The Homestead Act? Lincoln. The set-aside of public lands that would eventually become Yosemite National Park? Lincoln. He created the Department of Agriculture to support farmers, and the National Academy of Sciences to foster intellectual growth. He promoted free public education. Pressured by a combination of banking interests and foreign powers that threatened to cripple the nation’s ability to fund Lincoln’s policies and fight the war, Lincoln took an action that was seen as every bit as radical as his push to end slavery. He broke the nation away from the gold standard, issuing “greenback” currency supported only by the faith and credit of the United States.

At the heart of Lincoln’s policies was a man named Henry Carey. Carey, a free-trader turned American System believer after seeing the damage caused by insider deals and monopoly powers, came up with a new idea of protectionism. He viewed the government as the coordinating power, the only power that could intervene successfully against corporations and the wealthy to protect public interest. His idea of protectionism was not just using tariffs to grow domestic industry, but using government power to protect workers and the middle class. Carey was a champion of public education, seeing that a well-educated public was needed to ensure the kind of industrial and scientific advances the nation required. In his book, The Harmony of Interests, Carey made a fresh case for the American System, in which he went beyond theory and looked in detail at the economic cycles since the founding of the nation. While Carey agreed with free trade in theory, and applauded its application in trading between states, his data indicated that tariffs and subsidies, far from crippling the economy, had been highest at the times when the economy was growing most rapidly. No only that, exports had grown more quickly during periods when imports were restricted. He argued it was hard to find free trade's theoretical benefits in the real world.

Carey made a stark comparison between the results of the American System and free trade.

Two systems are before the world;... One looks to increasing the necessity of 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.
There’s a reason that goes beyond the prejudices of the day in why Carey points up the “Hindoo” as his example of an undesirable state. At the time his book was written in 1851, much of India was controlled by agents of the East India Company. The people there had been crushed by the direct actions of an international megacorporation with an imposed government and private army. To Carey, this represented the ultimate peril of unchecked free trade.

With Lincoln’s death, it was Carey who fought–with varying success– to extend his economic policies through the next two administrations.  Ultimately, many of the policies of the Lincoln Revolution were rolled back. The country was forced back onto the gold standard, and an austerity plan to pay off the nation’s debt as soon as possible further squeezed the economy. The result was an abrupt and sharp downturn. In 1873, the failure of brokerage house Jay Cooke and Company signaled the start of a massive collapse of the financial sector that would not be matched until the Great Depression.

Just as it had in the period leading up to Lincoln, the implementation of the American System over the century that followed would vary widely, before being pushed aside in favor of unfettered free trade and a much more limited role for the government. No administration would again embrace the American System so fully as that of Lincoln. There were no more "Henry Clay Whigs" to be found.

Republicans should be proud of the role Lincoln played in holding the nation together and in promoting human equality. They should also be proud of the role he played in advancing the nation’s economy and promoting a broad, educated middle class. For Lincoln, freedom wasn't a matter of being able to make as much money as possible. For Lincoln, freedom and equality meant seeing that people were lifted away from ignorance and poverty, and he believed that the government played the central role in seeing that this took place.

They should be proud of the American System, and of a history in which the Republican Party fought to use government as an instrument to steer the economy away from the accumulation of wealth by a few, and build a broad, educated, empowered middle class.

In this time when the Republican Party is searching for a new identity, they might want to think of reviving one that was made for them. It’s called the American System.

These works are available on-line (and yes, for free). They served as the principle sources for this essay.

Report on Manufactures by Alexander Hamilton
Henry Clay and the American System by Maurice G. Baxter
The Harmony of Interests by Henry Carey

Your Email has been sent.