The American School of Political Economy: Forging Economic Independence in the 19th Century

 

Preamble

In the aftermath of the American Revolution, the United States faced the daunting task of establishing itself as a sovereign nation, not only politically but also economically. The young republic was heavily dependent on British manufactured goods and financial systems, a legacy of its colonial past that threatened its autonomy. Against this backdrop, a distinct economic philosophy emerged in the 19th century, known as the American School of Political Economy. Championed by figures like Alexander Hamilton, Henry Clay, and Friedrich List, this school advocated for economic nationalism, emphasizing industrialization, protective tariffs, and public investment to achieve self-sufficiency. Rejecting the British doctrine of free trade, which was seen as a tool of economic imperialism, the American School sought to build a balanced economy capable of supporting a strong, independent nation. This write-up explores the principles, key thinkers, opposition, quantifiable achievements, and lasting legacy of the American School, situating it as a pivotal force in shaping the United States’ economic trajectory.

The American School: Principles and Key Thinkers

The American School of Political Economy was rooted in the belief that economic policies should serve national interests, prioritizing industrial development and economic independence over global trade integration. Its core framework, known as the "American System," rested on three pillars: protective tariffs to shield domestic industries, internal improvements (infrastructure projects) to integrate the national economy, and a national banking system to stabilize finance and support industry.

Alexander Hamilton: The Visionary Architect

Alexander Hamilton, the first U.S. Treasury Secretary, laid the intellectual foundation for the American School in his Report on Manufactures (1791). He argued that manufacturing was essential for national strength and that government intervention was necessary to nurture infant industries. Hamilton wrote:

"Not only the wealth; but 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." (Report on Manufactures, 1791)

Hamilton’s advocacy for protective tariffs and federal support for industry challenged the agrarian vision of contemporaries like Thomas Jefferson, setting the stage for a national debate on economic priorities.

Henry Clay: The Champion of the American System

Henry Clay, a prominent statesman, popularized the American System through his leadership in Congress. He saw tariffs, infrastructure, and banking as interconnected tools to unify the nation and promote economic independence. In an 1832 speech, Clay articulated the system’s goals:

"The great desideratum… is to render ourselves independent of foreign nations for the supply of those articles essential to our safety and defense… by the establishment of manufactures and the improvement of internal communications." (Speech on the Tariff, 1832)

Clay’s efforts led to tariffs like the Tariff of 1816, which imposed duties of 20–25% on imported goods, and supported projects like the Erie Canal, completed in 1825.

Friedrich List: The Theorist of National Economics

Friedrich List, a German economist whose ideas profoundly influenced American policymakers, argued that nations in early stages of industrialization required government support to develop their "productive powers." In his National System of Political Economy (1841), List critiqued British free trade as a tool of economic dominance:

"Free trade is the policy of the strong… A nation which is not yet industrially developed must protect its infant industries until they are strong enough to compete." (National System of Political Economy, 1841)

List’s emphasis on context-specific economic policies resonated in the U.S., where leaders sought to emulate Britain’s industrial success without remaining subordinate.

Erasmus Peshine Smith: Innovating Value Theory

Erasmus Peshine Smith contributed a novel perspective by developing a theory of value based on energy costs, foreshadowing ecological economics. He argued that economic progress depended on efficient resource use, with government directing investment toward productive industries. Smith wrote:

"The wealth of nations lies in their capacity to organize energy… The state must guide this process to prevent waste and monopoly." (A Manual of Political Economy, 1853)

Smith’s ideas reinforced the American School’s focus on state-led development and public welfare.

Opposition to the American School

The American School faced significant opposition, primarily from advocates of free trade and agrarianism who aligned with British classical economics, as articulated by Adam Smith and David Ricardo. These critics argued that free trade maximized global efficiency through comparative advantage, and they viewed government intervention as inefficient and distortionary.

Thomas Jefferson: The Agrarian Ideal

Thomas Jefferson, a proponent of an agrarian republic, opposed the American School’s industrial focus. He believed that agriculture was the backbone of American virtue and independence, warning against the social ills of urbanization and manufacturing. In his Notes on the State of Virginia (1785), Jefferson stated:

"Those who labour in the earth are the chosen people of God… While we have land to labour then, let us never wish to see our citizens occupied at a workbench." (Notes on the State of Virginia, Query XIX)

Jefferson’s vision clashed with Hamilton’s, as he feared that industrialization would lead to inequality and dependence on wage labor, undermining the yeoman farmer ideal.

Southern Planters and Free Trade Advocates

Southern planters, whose wealth depended on exporting cotton and tobacco, opposed protective tariffs, which raised the cost of imported goods and risked retaliatory tariffs from Britain, their primary market. John C. Calhoun, a leading Southern statesman, argued in 1837:

"The protective system… is a tax on the South for the benefit of the North… It compels us to buy dear and sell cheap." (Speech on the Tariff, 1837)

Calhoun and other Southern leaders saw free trade as essential to their economic interests, aligning with Ricardo’s theory of comparative advantage, which suggested that the South should specialize in agriculture.

Classical Economists: Universal Principles

American adherents of classical economics, such as William Cullen Bryant, editor of the New York Evening Post, criticized the American School for its rejection of universal economic laws. They argued that government intervention distorted markets and favored special interests. Bryant wrote in 1840:

"The doctrine of protection… sacrifices the general good to the profit of a few… Free trade is the natural order of commerce." (New York Evening Post, Editorial, 1840)

These critics viewed the American School’s protectionism as economically inefficient and morally suspect, accusing it of fostering monopolies under the guise of national interest.

Quantifiable Achievements and Linkages to the American School

The American School’s policies had a transformative impact on the U.S. economy, quantifiable through industrial growth, infrastructure development, and economic diversification. Key achievements include:

1. Industrial Growth: Protective tariffs spurred the growth of manufacturing. By 1860, the U.S. had over 140,000 manufacturing establishments, employing 1.3 million workers and producing $1.9 billion in goods (1860 Census). The textile industry, for instance, grew from 8,000 spindles in 1808 to 5.2 million by 1860, largely due to tariff protection.

2. Infrastructure Development: The American System’s emphasis on internal improvements led to significant infrastructure projects. The Erie Canal, completed in 1825 at a cost of $7 million, reduced shipping costs between Buffalo and New York City by 90%, boosting trade and integrating the Midwest with eastern markets. By 1860, the U.S. had 30,626 miles of railroads, more than the rest of the world combined, facilitated by federal and state subsidies.

3. Economic Diversification: The American School reduced U.S. dependence on British imports. In 1810, 80% of U.S. manufactured goods were imported; by 1860, domestic production accounted for 75% of manufactured goods consumed (Historical Statistics of the United States). This shift strengthened economic resilience during conflicts like the Civil War.

4. Banking and Finance: The Second Bank of the United States (1816–1836) stabilized the currency and extended credit, supporting industrial expansion. By 1830, the U.S. had 330 state-chartered banks with $145 million in assets, fostering investment in industry and infrastructure.

These achievements were directly linked to the American School’s policies. Tariffs provided the revenue and protection needed for industrial growth, while public investment in infrastructure lowered transportation costs and spurred commerce. The national banking system ensured financial stability, enabling long-term investment. The American School’s rejection of free trade allowed the U.S. to prioritize domestic development, creating a balanced economy that could compete globally by the late 19th century.

Conclusion

The American School of Political Economy was a visionary response to the challenges of a young nation seeking economic independence. By prioritizing industrialization, public investment, and context-specific policies, thinkers like Hamilton, Clay, List, and Smith forged a path distinct from British free trade imperialism. Despite opposition from agrarian and free trade advocates, the American School’s policies drove remarkable economic growth, transforming the U.S. into an industrial power by the late 19th century. Its legacy endures in modern debates about industrial policy, trade, and the role of the state in economic development. As global economic challenges persist, the American School’s emphasis on national sovereignty and strategic intervention offers timeless lessons for navigating an interconnected world.

References

1. Hamilton, Alexander. Report on Manufactures. 1791. Library of Congress.

2. Clay, Henry. "Speech on the Tariff." 1832. In The Life and Speeches of Henry Clay, Vol. 1. 1843.

3. List, Friedrich. National System of Political Economy. 1841. Translated by Sampson S. Lloyd, 1885.

4. Smith, Erasmus Peshine. A Manual of Political Economy. 1853. George P. Putnam.

5. Jefferson, Thomas. Notes on the State of Virginia. 1785. Query XIX.

6. Calhoun, John C. "Speech on the Tariff." 1837. In The Papers of John C. Calhoun, Vol. 13. 1979.

7. Bryant, William Cullen. "Editorial on Free Trade." New York Evening Post, 1840.

8. U.S. Census Bureau. 1860 Census: Manufactures of the United States. 1865.

9. Historical Statistics of the United States, Colonial Times to 1970. U.S. Census Bureau, 1975.

10. Fogel, Robert W. Railroads and American Economic Growth. 1964. Johns Hopkins University Press.

__________________________________________________________________

The above post was triggered by the following video

Economic Nationalism

Summary of the video:

• Historical Roots of Economic Nationalism: The discussion begins by exploring the origins of economic nationalism in the 19th century, particularly in the United States, with figures like Alexander Hamilton and Henry Clay advocating for industrialization as essential for political sovereignty [00:39].
• American School of Political Economy: Hudson emphasizes that early American economic policies were not about dominating other countries, but about achieving independence from British economic dominance [03:04]. He highlights the "American System" which included protective tariffs, internal improvements (public utilities), and a national banking system to finance industry [03:34].
• Rejection of Free Trade Imperialism: The United States aimed to counter Britain's free trade imperialism, which they viewed as a way of maintaining economic dependency [05:00]. They argued that economic principles were not universal and that each nation needed its own economic policies [06:50].
• Key Figures and Ideas: Hudson discusses figures like Friedrich List, who advocated for government support in developing industries, and Arasmus Peshine Smith, who developed a theory of value based on energy costs [11:04].
• Public vs. Private Sector: The American model emphasized public investment in infrastructure and basic services to avoid monopolies and ensure affordable access, contrasting with the British focus on land rent [13:35].
• The Neglect of American Economic History: Hudson notes that the American school of economics has been largely overlooked in economic history, especially after the U.S. became an industrial leader and promoted free trade [17:56].
• Critique of Trump's Policies: Hudson critiques Donald Trump's approach to tariffs and industrialization, arguing that tariffs alone are insufficient and that Trump's policies do not address the underlying issues of monopolization and rent-seeking in the U.S. economy [24:11].
• Modern Economic Challenges: Hudson contends that the U.S. faces challenges such as high debt, privatized monopolies, and the financial sector's dominance, which hinder re-industrialization and make American labor less competitive [27:56].
• Trump's Economic Agenda: Hudson argues that Trump's actual agenda is to benefit the wealthy by shifting the tax burden onto labor through tariffs, exacerbating class divisions [31:56].
• Relearning Industrial Capitalism: Hudson concludes by emphasizing the need to relearn the origins of industrial capitalism to achieve a more balanced economy [32:57].
  
  
  __________________________________________________________________

Notes -

Historical Context and the Drive for Economic Independence

In the early 19th century, the United States was a young nation seeking to establish itself as independent from British economic and political influence. The British Empire, with its mercantilist policies and later advocacy for free trade, sought to maintain economic dominance by encouraging colonial and post-colonial economies to remain agrarian and dependent on British manufactured goods. American thinkers recognized that reliance on British imports and financial systems would undermine the nation’s sovereignty. This realization spurred the development of economic nationalism, which emphasized industrialization as a means of achieving self-reliance.

The American Revolution (1775–1783) had already set the stage for this mindset, as the colonies sought to break free from British mercantilist restrictions. Post-independence, the challenge was to build an economy capable of supporting a sovereign nation. The War of 1812 further exposed the vulnerabilities of relying on foreign goods, as British blockades disrupted trade, reinforcing the need for domestic manufacturing and infrastructure.

The American System: Core Principles

The "American System," championed by figures like Alexander Hamilton and Henry Clay, was a comprehensive economic program designed to foster industrial growth and national unity. It rested on three pillars:

1. Protective Tariffs: Tariffs were imposed to shield nascent American industries from cheaper British imports. Hamilton, in his Report on Manufactures (1791), argued that infant industries required temporary protection to compete with established foreign competitors. This policy aimed to encourage the growth of domestic manufacturing, particularly in textiles, iron, and other foundational industries. For example, the Tariff of 1816 imposed duties of 20–25% on imported goods, signaling a commitment to industrialization.
2. Internal Improvements: Investment in infrastructure—roads, canals, and later railroads—was seen as essential to connect the vast American interior, facilitate trade, and integrate regional economies. Projects like the Erie Canal (completed in 1825) exemplified this focus, reducing transportation costs and linking agricultural producers in the Midwest with eastern markets. These public works were often funded by federal and state governments, reflecting a belief in the state’s role in economic development.
3. National Banking System: A stable financial system was critical to support industrial growth. Hamilton’s establishment of the First Bank of the United States (1791–1811) aimed to provide a national currency, manage government debt, and extend credit to businesses. The Second Bank of the United States (1816–1836), despite its eventual demise under Andrew Jackson, continued this effort to stabilize the economy and finance industrial expansion.

The American System was not merely a set of policies but a philosophical rejection of British economic orthodoxy, which prioritized free trade and comparative advantage. American thinkers argued that free trade benefited industrialized nations like Britain while keeping others in a state of economic dependency. By contrast, the American System sought to create a balanced economy with strong agricultural, industrial, and commercial sectors.

Key Figures and Intellectual Contributions

Several figures shaped the intellectual underpinnings of the American School, each contributing unique perspectives on economic nationalism:

• Alexander Hamilton (1755–1804): As the first U.S. Treasury Secretary, Hamilton laid the groundwork for economic nationalism. His Report on Manufactures advocated for government intervention to promote industry, arguing that manufacturing would diversify the economy and reduce reliance on foreign powers. Hamilton’s vision of a strong federal government as a catalyst for economic growth contrasted with Thomas Jefferson’s agrarian ideal, sparking early debates about America’s economic path.
• Henry Clay (1777–1852): A prominent statesman, Clay popularized the American System through his political leadership in Congress. He saw tariffs, infrastructure, and banking as interconnected tools to unify the nation and promote economic independence. Clay’s advocacy for internal improvements, such as the National Road, aimed to bind the nation’s regions together, countering sectionalism.
• Friedrich List (1789–1846): A German economist who influenced American thought, List argued that nations in the early stages of industrialization required government support to develop their "productive powers." In his National System of Political Economy (1841), List critiqued British free trade as a tool of economic imperialism, advocating for protective tariffs and state-led industrialization. His ideas resonated in the U.S., where policymakers sought to emulate the industrial success of Britain without falling under its economic sway.
• Erasmus Peshine Smith (1814–1882): A lesser-known but innovative thinker, Smith developed a theory of value based on energy costs, anticipating later concepts in ecological economics. He argued that economic progress depended on harnessing natural resources efficiently, with government playing a role in directing investment toward productive industries. Smith’s work highlighted the American School’s emphasis on adapting economic theory to national circumstances.

Rejection of Free Trade Imperialism

The American School explicitly rejected the universalism of British classical economics, as articulated by Adam Smith and David Ricardo. Ricardo’s theory of comparative advantage suggested that nations should specialize in what they produce most efficiently, trading freely to maximize global wealth. However, American economists saw this as a trap: free trade would lock the U.S. into an agrarian role, exporting raw materials (e.g., cotton, tobacco) while importing manufactured goods, thus perpetuating dependence on Britain.

Instead, American thinkers argued that economic principles were context-specific. Each nation needed policies tailored to its stage of development, resources, and political goals. This perspective aligned with List’s notion of "national economics," which prioritized the long-term development of a nation’s productive capacity over short-term gains from trade. By fostering domestic industries, the U.S. aimed to achieve economic parity with Europe, ensuring that it could negotiate on equal terms in global markets.

Public vs. Private Sector: A Distinctive Approach

A hallmark of the American School was its emphasis on public investment in infrastructure and services to prevent monopolies and ensure broad access. Unlike Britain, where land rents and private monopolies dominated the economy, American policymakers sought to democratize economic opportunity. For example:

• Public Infrastructure: Canals, roads, and railroads were often built or subsidized by the government to lower transportation costs and stimulate commerce. The federal government’s role in funding these projects was seen as a way to serve the public interest, rather than enriching private investors.
• Anti-Monopoly Measures: The American School viewed monopolies—whether in land, transportation, or industry—as threats to economic fairness. By investing in public utilities, the government aimed to keep essential services affordable and accessible, contrasting with the British model, where aristocratic landowners extracted high rents.

This public-oriented approach reflected a broader American ethos of egalitarianism, at least in economic policy, though it coexisted with contradictions like slavery and land dispossession.

The Neglect of the American School

As the United States emerged as an industrial powerhouse by the late 19th century, its economic policies shifted. Having achieved industrial dominance, the U.S. began to embrace free trade, aligning more closely with British economic principles. This shift marginalized the American School, which was increasingly seen as outdated in an era of global markets. The rise of neoclassical economics, with its focus on universal principles and mathematical models, further sidelined the context-specific, state-driven approach of the American School.

Michael Hudson’s observation that the American School has been overlooked in economic history points to a broader trend: the erasure of heterodox economic traditions in favor of a homogenized narrative of free-market capitalism. The American School’s emphasis on government intervention, protectionism, and public investment challenges the neoliberal orthodoxy that dominates contemporary economics. Its neglect may also reflect the discomfort of later American elites with acknowledging the state’s role in building the nation’s industrial base, as this contradicts the myth of rugged individualism.

Legacy and Contemporary Relevance

The ideas of the American School resonate in modern debates about industrial policy, trade, and economic sovereignty. For instance:

• Industrial Policy: Recent U.S. initiatives, such as the CHIPS Act (2022) and the Inflation Reduction Act (2022), reflect a revival of government-led efforts to bolster domestic industries, echoing Hamilton’s and Clay’s emphasis on strategic investment.
• Trade Policy: The skepticism of free trade’s universal benefits, central to the American School, finds parallels in contemporary critiques of globalization’s impact on domestic manufacturing and inequality.
• Infrastructure Investment: Calls for renewed public investment in infrastructure, such as high-speed rail or green energy, align with the American System’s focus on internal improvements as a driver of economic growth.

Moreover, the American School’s rejection of economic universalism offers a framework for developing nations seeking to navigate global trade while protecting their economic interests. Its emphasis on tailoring policies to national contexts remains a powerful counterpoint to one-size-fits-all economic prescriptions.

The American School of Political Economy was a bold intellectual and policy movement that shaped the United States’ rise as an industrial power. By prioritizing economic nationalism, government intervention, and public investment, it challenged British economic dominance and laid the foundation for a diversified, self-sufficient economy. Figures like Hamilton, Clay, List, and Smith articulated a vision of economic development that was pragmatic, context-specific, and attuned to the needs of a young nation. Though largely forgotten in mainstream economic history, the American School’s insights remain relevant for understanding the role of the state in fostering economic resilience and sovereignty in an interconnected world.