Tuesday, August 25, 2015

Lincoln's Economic Adviser on Competing Economic/Political Systems - Compare to Today's

"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."

Henry Carey, Harmony of Interests, 1851

Henry Carey was one of the most influential American economists of the first half of the 19th Century, a strong supporter of Henry Clay's "American System," and an adviser to Abraham Lincoln. Lincoln often said he was a disciple of Clay, perhaps the most powerful and influential American political figure other than Benjamin Franklin never to become President. 

Clay's "American System," which he mostly borrowed from the ideas of the nation's first Secretary of the Treasury, Alexander Hamilton, had three main features: High tariffs to protect American industry; Federal government investment in "internal improvements," (what we call "infrastructure" today); and a national bank to establish a viable monetary system. 

Congress adopted the tariff in 1815 and the second Bank of the United States. Strong opposition, mostly from Southern interests blocked any substantial funding of "internal improvements. When the tariff - which was the prime source of revenue for the national government - was increased in the 1820s, South Carolina nullified it and threatened secession.

President Andrew Jackson, a bitter enemy of Clay and an opponent of the "American System" because he was a follower of Jefferson's belief in a limited federal government, nevertheless was a strong nationalist. He threatened military action against South Carolina and wrote perhaps the strongest argument ever against any state's right to nullify a national law or to secede from the union, calling such action "treason." He reached a compromise by lowering the tariff.

Jackson refused to fund much in the way of "internal improvements," and he stopped construction of the national highway that had been built from Cumberland, Maryland to the state border of Kentucky, Clay's home state. He was the last President to pay off the national debt and when the federal government had a surplus, instead of spending it, he wanted to return the money to the states.

Jackson vetoed Congress's approval of the rechartering of the Bank of the United States, and killed the powerful bank. He viewed the bank, which had virtual control of the nation's money supply as a tool of an Eastern elite that did not operate in the interests of most of the people. His veto statement is one of the earliest arguments against banking that became a key plank in the program of the Populist movement late in the 19th Century. He did not like paper money, which in those days consisted of notes issued by banks, supposedly convertible into gold. The only money issued by the federal government was coinage. There often were many more notes than could be converted into gold. There was a "musical chairs" aspect to this monetary system. Whoever was the last to use a failed bank's note to pay for something was liable for its value, and whatever property was purchased with it could be foreclosed on if that person or business could not make good on the note. Jackson lost his home when he was young because of a bank failure and he forever after hated and distrusted banks.

Without a national bank controlling the issuing of paper money, and effectively the number of state banks, banking at the state level expanded dramatically as did the supply of bank notes. With much more money in circulation the growth of the economic accelerated. Of course, so did inflation. The first result was a crash and a long and vicious depression in the late 1830s. However, without a national bank's controls, much more competition developed among state banks helping to fuel dramatic economic expansion and technological development in the 1840s and 50s, led by the new railroad and telegraph systems.

When Lincoln became President in 1861, the key features of Clay's "American system" no longer could be blocked by the South, which had seceded from the Union. Instead of creating one Bank of the United States, Lincoln created a system of chartered "national banks" giving them the power to control the monetary system. He also raised the tariffs dramatically, and he supported the federal government helping to finance the Transcontinental Railroad, among other things. 

Lincoln's vision of an activist federal government that was inspired by Clay, who had gotten most of his ideas from Hamilton, ended with his death. The Presidents who followed him for the rest of the 19th Century were conservative, and generally passive in governing. Once Reconstruction ended in 1876, the South returned to significant power in Congress with essentially the same position of limiting the functions and power of the federal government. 

Things did not change much until an assassin's bullet in 1901 brought Theodore Roosevelt, and his progressive views and enormous political skill, to the Presidency.

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