The Next American System

To thrive in a twenty-first century economy, America needs a new physical and financial infrastructure.

Promoting American competitiveness. Rebuilding America’s infrastructure. Redesigning American finance. These three themes are currently the subjects of three different conversations in American politics. Over here is the discussion of the package of tax policies, R&D, and skills education required to maintain America’s edge in technological innovation and manufacturing in the global market. Over there is the debate about how to repair and replace America’s crumbling infrastructure. And nearby, at a distance from both, is yet a third discussion of how to regulate the U.S. and global financial systems, shaken by the home mortgage securities meltdown and other market crises.

Each is different, but none of these debates can be useful without reference to the others. American global competitiveness depends in part on an efficient national infrastructure and a suitable and sound financial sector. Infrastructure needs, in turn, are determined in part by the kind and location of industries in the United States. And one of the goals of reforming and regulating finance is to ensure that American industry and American infrastructure have access to the private and public investment they need. Industry, infrastructure, and finance form a system–an American System. And a new American system, well-designed and well-implemented, will be crucial in revitalizing American economic prosperity in the twenty-first century.

The term “American System” was used in the first half of the nineteenth century by the great Kentucky Senator Henry Clay and his allies to describe their program of using federal policy to promote a dynamic, industrial, capitalist economy: infant-industry tariffs to promote fledgling American manufacturing enterprises; the sale of public lands to subsidize “internal improvements” like roads, canals, and railroads; and a centralized national banking system. Likewise, a number of reforms that strengthened American industrial capitalism in the twentieth century–from the creation of the Federal Reserve in the early 1900s to the interstate highway system and the creation of a global market for American exports following World War II–can be thought of as a “Second American System.”

Many of the policy tools used by these earlier American systems are obsolete today. But the idea is not. Now, as in the nineteenth and twentieth centuries, national economic development rests on a mutually reinforcing triad of policies to encourage American industry, national infrastructure, and adequate finance. We need to replace three isolated conversations about these critical subjects with a single national debate about how to bring about the next American System.

Today, as in the past, the idea of an American system of economic development is rejected in part or in whole by some Americans. A dwindling remnant of states-rights conservatives, such as former Republican presidential candidate Fred Thompson, on principle opposes a strong and activist federal government. Then there are market fundamentalists like John McCain’s economic adviser Douglas Holtz-Eakin, who has argued against the evidence of history that public investment in infrastructure contributes nothing to productivity growth, compared to tax cuts for the rich. Some on the left, sensing corruption in all government policies to help private enterprise, make the opposite mistake. The architects of the First and Second American Systems answered similar objections and overcame similar opposition in their eras. Their successes and occasional failures offer valuable lessons that can be applied in creating a New American System and rebuilding America in the emerging century.

The First American System

As an aide to George Washington during the Revolutionary War, Alexander Hamilton became convinced that the United States needed its own manufacturing industries for reasons of military defense. In his 1791 “Report on Manufactures,” Hamilton, then the first secretary of the Treasury, sought to persuade Congress of the need for federal support of industrial capitalism, by measures including subsidies and tariffs, to foster “infant industries” until they were strong enough to compete with the established industries of commercial and military rivals. Hamilton also recommended the creation of the first Bank of the United States, which was established by Congress in 1791 with a 20-year charter.

A version of Hamilton’s program for promoting industrial growth in the U.S. was championed by Henry Clay, who served both as Speaker of the House and as a long-time senator from Kentucky. In a detailed speech in the House of Representatives on March 30 and 31, 1824, entitled “In Defense of the American System, Against the British Colonial System,” Clay linked the need for the United States to have a machine-based economy of its own with the military and economic threat posed by the industrial supremacy of Britain, noting that “Britain is herself the most striking illustration of the immense power of machinery…In the creation of wealth…the power of Great Britain, compared to that of the United States, is as eleven to one.”

In Clay’s American System, tariffs would protect infant U.S. industries from British competition. The sale of federal lands would finance “internal improvements,” that is, infrastructure projects like harbors and roads and canals and later railroads. Fiscal order would be provided by the Second Bank of the United States, which was chartered in 1816. Clay democratized Hamiltonianism by connecting the dynamism of the American System with upward mobility for “the self-made man”–a phrase Clay coined.

In 1860, the South’s secession gave proponents of the American System their chance. President Abraham Lincoln, a member of the new Republican party who described himself as “an old-line Henry Clay Whig,” signed one law after another to promote industry, infrastructure and sound finance. High tariffs protected infant American industries. In 1862, Congress passed legislation spending millions on a Pacific rail line to be built and operated by two companies, the Union Pacific and Central Pacific, while other railroads were given federal lands as subsidies. The Legal Tender Act of 1862 and the National Currency Acts of 1863, revised as the National Bank Act in 1864, created a new federal banking system, eliminating state bank notes and creating nationally chartered banks.

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