An American System for America Prosperity

Our founders understood that America could not be independent and strong if we relied on other nations for our manufactured goods. They understood the United States had the natural resources, the technology, the labor force, and ample customers at home to support domestic industry and be largely self-sufficient.

As an example to his countrymen to “Buy American,” George Washington wore a suit of American-made cloth at his inauguration in 1789. “I hope it will not be a great while before it will be unfashionable for a gentleman to appear in any other dress. Indeed, we have already been too long subject to British prejudices,” he wrote. Washington believed the United States could manufacture as well as farm, and he instructed Treasury Secretary Alexander Hamilton to come up with a plan to develop industry on these shores.

Hamilton’s plan, detailed in his 1791 Report on the Subject of Manufactures, called for tariffs that would raise revenues and protect infant American industries against predatory competition, and government procurement contracts to encourage American manufacturers.

What Is the American System?

The American System, also called the American School of economics, guided U.S. national economic development from the earliest days of the republic, through the Civil War, and into the better part of the 20th century. It built the United States from an agrarian frontier society into the world’s largest economy and greatest industrial power.

The American System had three basic tenets to promote domestic industry. The government would:

1. use tariffs to discourage imports, and leverage the purchasing power of government to give preference to domestic producers;
   
2. invest in roads, ports, dams, canals, and turnpikes—then called “internal improvements,” now called infrastructure—to facilitate commerce; and
   
3. regulate credit to spur economic development and deter speculation.

Congress passed the Tariff Act of 1789 as its second piece of legislation. The opening section reads, “It is necessary for the support of the government, the discharge of the debts of the United States, and for the encouragement and protection of manufactures that a duty be laid on goods and merchandise imported.”

The tax on imports raised revenue to fund the government and prevented foreign goods from smothering our own infant industries. Tariffs were the nation’s primary source of revenue for its first 150 years. Consider: we taxed foreign industries, not our own.

In 1791, Treasury Secretary Alexander Hamilton delivered his Report on the Subject of Manufactures to President Washington. It laid out the plan for the federal government to nurture the growth of domestic manufacturing industries in the United States rather than allow the new nation to depend on manufactured goods from abroad.

Hamilton declared: “Not only the wealth; the 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. These comprise the means to Subsistence habitation clothing and defence.”

A diversified economy of agriculture, merchants, and manufacturing would provide opportunities for Americans of all skills, “furnishing greater scope for the diversity of talents and dispositions which discriminate men from each other,” Hamilton wrote.

Hamilton’s report stood in contrast to “free traders” who believed America should confine itself to farming, export raw materials, and buy manufactured goods from Great Britain.

Thomas Jefferson Has a Change of Heart

At first, Thomas Jefferson was one of those free traders. He opposed developing American industry. Jefferson envisioned a purely agricultural economy that would “let the work-shops” remain in Europe.

But Jefferson had a change of heart, writing in 1809:

My idea is that we should encourage home manufactures to the extent of our own consumption of everything of which we raise the raw material. I do not think it fair [of] the ship-owners to say we ought not to make our own axes, nails, &c., here, that they may have the benefit of carrying the iron to Europe, and bringing back the axes, nails, &c.

Shorter version: if we can make it here, we should make it here.

The War of 1812 cemented Jefferson’s commitment to economic nationalism. The war began as a trade dispute. Britannia ruled the waves, and its navy embargoed “those necessaries for which we have permitted ourselves to be dependent on others, even . . . clothing,” as he put it. British rockets inspired the lyrics to our national anthem, British forces burned the White House, and British free trade fired Jefferson’s commitment to tariffs and American national self-sufficiency. He wrote in 1815:

The prohibiting duties [tariffs] 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.

Jefferson explicitly renounced his earlier belief that America should be a strictly agrarian nation that depended on England “for manufactures.” He went out of his way to disabuse Benjamin Austin of that notion in 1816, writing:

To be independent for the comforts of life we must fabricate them ourselves. We must now place the manufacturer by the side of the agriculturist . . . Shall we make our own comforts, or go without them, at the will of a foreign nation? He, therefore, who is now against domestic manufacture, must be for reducing us either to dependence on that foreign nation, or to be clothed in skins, and to live like wild beasts in dens and caverns. I am not one of these; experience has taught me that manufactures are now as necessary to our independence as to our comfort; and if those who quote me as of a different opinion, will keep pace with me in purchasing nothing foreign where an equivalent of domestic fabric[ation] can be obtained, without regard to difference of price, it will not be our fault if we do not soon have a supply at home equal to our demand, and wrest the weapon of distress from the hand which has wielded it. 

Notice that Jefferson encouraged buying the American goods “without regard to difference of price”—that is, even if the imports were cheaper. “Cheap” and “cheaper” did not enter the patriot’s thinking. 

The most famous and influential advocate of the American System was Henry Clay of Kentucky. He served as speaker of the House and later as a senator. Clay’s famous “American System” speech from 1824 describes America’s current crisis—and the solution:

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: When We Buy American,

We Get the Goods and the Money

Abraham Lincoln was Henry Clay’s acolyte and a firm believer in the genuine American System. “Give us a protective tariff and we will have the greatest country on earth,” Lincoln declared while campaigning for Henry Clay in 1844.

Congressman Lincoln argued, “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.” Unemployment, want, and ruin were concerns then as now.

Lincoln ran on a platform of “protection [tariffs], homesteads [free Western land], rivers and harbors [internal improvements], and the Pacific railroad.” The industrial states of the North handed him the presidency. For building the transcontinental railroad, Lincoln insisted American steel be used even though British rails were cheaper. “When we buy manufactured goods abroad, we get the goods and the foreigner gets the money. When we buy the manufactured goods at home, we get both the goods and the money,” said Abe. More honest words have never been spoken.

Lincoln’s economic policy was driven by the conviction that production has primacy over consumption. Producing more enables one to consume more—that’s how to raise the American standard of living. Workers who produce more earn more and spend more. Consumption would rise in tandem with production and earning. Build it, and they will come.

“Every man is a consumer to the whole extent of his production. To that point he will go, and beyond it he cannot go,” wrote Henry Carey, Lincoln’s economic adviser. By earning (producing) more, one is able to consume (buy) more. Producing always comes first. Rather than seeking cheaper goods, the goal is “to produce dear labour, that is, high-priced and valuable labour,” Carey wrote.

“Cheap Is the Badge of Poverty”

William McKinley was another champion of the American System and would become the 25th president of the United States in 1896. As chairman of the House Ways and Means Committee, he fathered the tariff that bore his name. The philosophy behind the McKinley Tariff was simple. McKinley believed a foreign manufacturer had

no right or claim to equality with our own. He is not amenable to our laws . . . He pays no taxes. He performs no civil duties . . . He contributes nothing to the support, the progress, and glory of the nation. Free foreign trade . . . results in giving our money, our manufactures, and our markets to other nations, to the injury of our labor, our tradespeople and our farmers.

If American industry has to pay taxes and the costs of our labor, health, and environmental laws, it only makes sense that foreign manufacturers should bear a similar burden if they want to sell on our shores. McKinley’s warning from two centuries ago rings true today. Change “Europe” to “Asia” and these ring as the words of a prophet:

This country will not and can not prosper under any system that does not recognize the difference of conditions in Europe and America. Open competition between high-paid American labor and poorly paid European labor will either drive out of existence American industry or lower American wages.

In 1889, President McKinley also had an answer for those who say cheap imports are good for America:

They say ‘everything would be so cheap’ if we only had free trade. Well, everything would be cheap and everybody would be cheap. I do not prize the word “cheap.”. . . It is the badge of poverty . . . when things were the cheapest, men were the poorest . . . Cheap? Why, cheap merchandise means cheap men, and cheap men mean a cheap country; and that is not the kind of Government our fathers founded. . . We want labor to be well paid, we want the products of the farm, . . . we want everything we make and produce to pay a fair compensation to the producer. That is what makes good times.

“A fair compensation to the producer”—take care of the producer and the rest will take care of itself.

The man who succeeded McKinley in the White House, Teddy Roosevelt, declared, “Thank God I am not a free trader.” He understood how tariffs “will equalize the cost of production here and abroad; that is, will equalize the cost of labor here and abroad.”

When Washington, D.C., pursued the American System, from the 1860s to the first decade of the 20th century, America’s gross national product quadrupled. United States coal production rose by 800 percent, steel rails by 523 percent, railroad track mileage by 567 percent, and wheat production by 256 percent.

We surpassed Britain as the world’s major industrial power, with output rising four times, from half of Britain’s to more than double. Following the path set by Washington, Hamilton, Clay, and Lincoln, America grew from an agrarian outpost to the greatest industrial power in world history in a century. It was not a coincidence we had the highest tariff rates in history at the same time we saw the greatest economic expansion in history. Meanwhile, Europe and the Third World stagnated under free trade.

“A People Who Cannot Supply Their Own Demand

Are Not Independent”

The goal of the patriots who built this country was political and economic independence. William “Pig Iron” Kelley, a congressman from Philadelphia and chairman of the powerful tax-writing committee, believed iron and steel were the muscles of modern civilization. He understood economic and political independence are connected. “A people who cannot supply their own demand for iron and steel but purchase it from foreigners beyond seas, are not independent . . . they are politically dependent.”

These patriots likened their cause to war—economic war—defending America against enemies with “missiles launched from their far-distant mines, mills, and factories,” an attack that has “broken up industries as effectually as if the conquest had been effected by warlike weapons,” Kelley declared.

The American System aims at delivering a higher standard of living for Americans—higher wages for workers, fair compensation for producers—rather than lower prices for consumers because the consumer is the producer—and must first be a producer. Americans would find gainful employment producing the goods they consumed. It was a virtuous cycle, with “consuming” (buying) recycling wealth into the pockets of the “consumers,” who were, importantly, producers of the goods as well. Americans made what they bought and bought what they made.

But toward the middle of the last century, under both Democratic and Republican administrations, the United States government increasingly abandoned the American System, the economic policies that built us into the greatest industrial power on earth.

The pursuit of global free trade brought about the collapse of American industries and wages as the United States imported more and more of the goods we had once produced ourselves. The loss of revenue from bankrupted industries and Americans either unemployed or forced into lower-paying service jobs created yawning budget deficits at the municipal, state, and federal levels.

The good news is we can revive the virtuous cycle that resulted in the broad-based prosperity the world envied. We can make what we buy. We don’t have to be dependent on others. We have the resources and the talent to fabricate “the comforts of life” ourselves.

And we have the will. We must once again declare our independence. Two hundred forty-seven years ago, Great Britain was waging economic war against us. Today, it is Communist China. The course of independence, national self-sufficiency, would be good for us, and good for the world.

Henry Carey wrote two centuries ago,

To raise the value of labor throughout the world, we need only to raise the value of our own . . . To diffuse intelligence and to promote the cause of morality throughout the world, we are required only to pursue the course that shall diffuse education throughout our own land, and shall enable every man more readily to acquire property, and with it respect for the rights of property.

Setting the Record Straight on Adam Smith

The ideology of “global free trade” has stripped our land of industry, destroyed the middle class, and weakened our nation. Its defenders claim globalism is the free market at work, as American as apple pie. They are wrong. The ideology of global free trade is not American nor is it the free market system.

In 1776, Adam Smith published The Wealth of Nations, his foundational economic treatise on the principles of the free market system. Contrary to what so many today mistakenly believe and claim, Smith did not argue for a world without nations or a world where corporate interests came before national interests. Smith wrote about increasing the wealth of nations, not the wealth of transnational corporations or the wealth of “the global economy.”

Smith was an economic nationalist. He was a Britain First man. He put national interests first. He supported laws that required trade with Britain be done exclusively on British ships. He believed nations should import what couldn’t be produced at home and export the surplus that wasn’t consumed at home.

Today, those who oppose tariffs on imports from China often invoke Adam Smith to justify their position. They really should know better. Adam Smith would approve of the tariffs. How do we know? He said so. Let’s go to his own words. 

Adam Smith’s Guide to Tariffs

In The Wealth of Nations Adam Smith describes the circumstances when a nation should impose tariffs and restrict imports, when, as he wrote, it would be “advantageous to lay some burden upon foreign [imports], for the encouragement of domestic industry.” Notice he explicitly says he wants to encourage domestic industry—he makes a distinction between his nation’s industry and those of another nation. He is not writing about a global economy without distinction among nations.

First, Smith said tariffs are justified to protect industries “necessary for the defense of the country.” The defense of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly on the trade of their own country, in some cases by absolute prohibitions, and in others by heavy burdens upon the shipping of foreign countries.

Smith believed the defense of Great Britain justified a monopoly on shipping and trade. Therefore, he supported the Act of Navigation and Trade, which kept foreign ships out of British ports. (This would become a flash point with the North American colonies that led to the establishment of a new American nation.)

America, until recently, depended on Russia to launch our spy satellites, and China still produces electronics for our jet fighters. Foreign competitors enjoying subsidies from their governments and duty-free access to our market have decimated our own space launch and electronics industries. Adam Smith would not approve of our national government standing idly by and allowing this to happen.

Another case, Smith wrote, “in which it will generally be advantageous to lay some burden upon foreign imports for the encouragement of domestic industry, is, when some tax is imposed on the [domestic industry.] In this case, it seems reasonable that an equal tax [i.e., tariff] should be imposed” on the foreign imports.

Minimum wage laws, environmental and workplace safety regulations, and Social Security and Medicare costs are examples of taxes imposed on American industry. Their costs are reflected in the price of goods produced in the United States. According to Smith’s doctrine, “an equal tax should be imposed upon” imports to level the playing field for American producers.

Another of those occasions for which Smith advocates tariffs is when

Some foreign nation [may restrain] by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours.

For decades, China has slapped stiff tariffs on American imports to keep them out while we let their goods pass through our ports practically duty-free. In situations like this, Adam Smith advises it’s wise to impose similarly high tariffs because “retaliations of this kind . . . will procure the repeal of the high duties” placed on our own exports. To do less would amount to unilateral disarmament in the economic war China is waging against America.

Finally, Smith understood that the purpose of trade is to increase the wealth of the nation and benefit its people. Any theory of trade is worthwhile only so far as it advances the well-being of real people living in the real world. The economy must serve man, not the other way around.

In this spirit he wrote, “Humanity may require” import tariffs to be reduced gradually, “and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence.”

What he wrote three centuries ago we see today. A flood of “cheaper foreign” imports of the clothing we wear, the TVs we watch, the cars we drive, the machines we work on, and the toys our children play with “poured so fast” into our land that Americans who once produced “goods of the same kind,” with their own hands, have been deprived of their “employment and means of subsistence.” Indeed, this flood has swept many Americans into a valley of death, deprivation, and poverty.

Adam Smith would not approve of the “open borders at whatever cost” course our nation has been on. In fact, he would regard the free trade absolutists of today as delusional. “To expect . . . that freedom of trade should ever be entirely restored in Great Britain is as absurd as to expect that an Oceana or a Utopia should ever be established in it,” Smith wrote.

Smith: Give Money and Jobs to the Greatest Number of

Your Country’s People

Today’s evangelists of globalism and free trade also rely on a selective reading—actually, a misreading—of another classic economic text to justify the outsourcing of our industries to places like communist China. They point to David Ricardo’s treatise from 1817 in which he laid out the theory of “comparative advantage” in international trade, On the Principles of Political Economy and Taxation.

Ricardo calls for an international division of labor, with countries specializing in those particular goods they are best at making and trading with other countries for other goods, rather than making everything at home. He uses the example of Portugal trading Madeira wine for British textiles.

But today’s free-trade-über-alles lobby ignores the important premise underlying Ricardo’s theory: he assumes capital will not cross national borders; it will stay in its country of origin. That, of course, is not what’s happening today. Global corporations and financiers move assets and capital around the globe in nanoseconds with a keystroke.

In his famous treatise, Ricardo explains the crucial caveat to his theory:

The fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital.

In plain English, he’s saying no one will sink their capital in a foreign country ruled by “a strange government and new laws” for the same reason they won’t leave family, friends, and their native country behind to live in a foreign country. They’re not comfortable entrusting their lives and fortunes to strangers.

On this point, he and Adam Smith agreed. Smith said a businessman will “employ his capital as near home as he can” so he can keep an eye on it. “He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress.”

Thus “every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country.”

Smith thought this inclination to invest in one’s own country was a positive thing, not a shortcoming. He cited it as an example of how an “invisible hand” works to promote a broader good:

By preferring the support of domestic to that of foreign industry, he intends only his own security; . . . he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. . . By pursuing his own interest, he frequently promotes that of the society.

Ricardo also recognized “men of property” would be “satisfied with a low rate of profits in their own country, rather than seek” higher profits “in foreign nations.”

And he too didn’t see this as a negative, the symptom of weak sentimentality or lack of steely nerves. To the contrary, Ricardo said he’d “be sorry to see weakened” this natural affinity to one’s country. That’s quite different from today’s business leaders who forget America and couldn’t care less about their fellow Americans. These executives see themselves as too sophisticated for “nostalgic nationalism” and dream of a fully integrated global economy efficiently combining the resources of country X with the labor of country Y to serve markets in country Z, free of “restrictions imposed by individual national governments,” as Wall Street banker and former State Department official George Ball told Congress in 1967.

This ideology of globalism has nothing in common with the economic nationalism of Adam Smith, nor does the regime in Beijing adhere to the principles of the free market system. David Ricardo and Adam Smith counseled capitalists to avoid investing in “a strange government” lest they “happen to be deceived.”

Today’s captains of industry and finance ignored that advice and gambled their capital, their enterprises, and the future of our nation on a totalitarian regime. And deceived they were. They thought the World Trade Organization could save them, but they were wrong. The CCP lies, cheats, steals, and violates every promise it makes, including those it makes to the WTO.

Instead of following fanciful theories of “free trade,” we’d do better to stick to the system of free markets and economic nationalism taught by Adam Smith—an American system, for American prosperity