Economic History of The United States - New Nation

New Nation

Frank Bourgin's 1989 study of the Constitutional Convention shows that direct government involvement in the economy was intended by the Founders. This had more to do with the perceived need to overcome the economic and financial chaos the nation suffered under the Articles of Confederation, and nothing to do with any desire to have a statist economy. The goal was to ensure that dearly won political independence was not lost by being economically and financially dependent on the powers and princes of Europe. The creation of a strong central government able to promote science, invention, industry and commerce, was seen as an essential means of promoting the general welfare and making the economy of the United States strong enough for them to determine their own destiny.

Both the Revolution, and the creation of the Constitution and federal union, were motivated by specific beliefs that only a republican form of government could ensure political and economic freedom; that the goal of any good government was to promote the general welfare, and that the maintenance of republican government depended above all else on a sense of public virtue, or civic virtue. In his 1973 study of the economic principles established at the foundation of the United States, E.A.J. Johnson wrote:

The general view, discernible in contemporaneous literature, was that the responsibility of government should involve enough surveillance over the enterprise system to ensure the social usefulness of all economic activity. It is quite proper, said Bordley, for individuals to “choose for themselves” how they will apply their labor and their intelligence in production. But it does not follow from this that “legislators and men of influence” are freed from all responsibility for giving direction to the course of national economic development. They must, for instance, discountenance the production of unnecessary commodities of luxury when common sense indicates the need for food and other essentials. Lawmakers can fulfill their functions properly only when they “become benefactors to the publick”; in new countries they must safeguard agriculture and commerce, encourage immigration, and promote manufactures. Admittedly, liberty “is one of the most important blessings which men possess,” but the idea that liberty is synonymous with complete freedom from restraint “is a most unwise, mistaken apprehension.” True liberty demands a system of legislation that will lead all members of society “to unite their exertions” for the public welfare. It should therefore be the policy of government to aid and foster certain activities or kinds of business that strengthen a nation, even as it should be the duty of government to repress “those fashions, habits, and practices, which tend to weaken, impoverish, and corrupt the people.”

As John Kasson wrote:

The questions of the introduction of domestic manufactures and the role that labor-saving machines might play in American life were considered not as isolated economic issues but as matters affecting the entire character of society. No doubt profit motives existed, but would-be manufacturers had to make cogent arguments which addressed broader ideological concerns. “In addition to asking “How much will it pay?” they had to consider as well, ”How will it advance the cause of republicanism?” The question was not rhetorical – not at this time at least.

The U.S. Constitution, adopted in 1787, established that the entire nation was a unified, or common market, with no internal tariffs or taxes on interstate commerce. The extent of federal power was much debated, with Alexander Hamilton taking a very broad view as the first secretary of the treasury during the presidential administration of George Washington. He succeeded in building a strong national credit based on taking over the state debts and bundling them with the old national debt into new securities sold to the wealthy. They in turn now had an interest in keeping the new government solvent. Hamilton funded the debt with tariffs on imported goods and a highly controversial tax on whiskey. Hamilton believed the United States should pursue economic growth through diversified shipping, manufacturing, and banking. He sought and achieved Congressional authority to create the First Bank of the United States in 1791; the charter lasted until 1811.

Thus, what emerged in the United States in the first half of the eighteenth century was a system of political economy that became known around the world as the American School, generally understood to be in opposition to the British system The American System was inspired by the ideas of Alexander Hamilton, who proposed the creation of a government-sponsored bank and increased tariffs to favor northern industrial interests. Following Hamilton's death, the more abiding protectionist influence in the antebellum period came from Henry Clay and his American System.

Specific government programs and policies which gave shape and form to the American School and the American System include the establishment of the Patent Office in 1802; the creation of the Coast and Geodetic Survey in 1807 and other measures to improve river and harbor navigation; the various Army expeditions to the west, beginning with Lewis and Clark's Corps of Discovery in 1804 and continuing into the 1870s, almost always under the direction of an officer from the Army Corps of Topographical Engineers, and which provided crucial information for the overland pioneers that followed; the assignment of Army Engineer officers to assist or direct the surveying and construction of the early railroads and canals; the establishment of the First Bank of the United States and Second Bank of the United States as well as various protectionist measures (e.g., the tariff of 1828).

Thomas Jefferson and James Madison opposed a strong central government (and, consequently, most of Hamilton's economic policies), but they could not stop Hamilton, who wielded immense power and political clout in the Washington administration. In 1801, however, Jefferson became president and turned to promoting a more decentralized, agrarian democracy called Jeffersonian democracy. (He based his philosophy on protecting the common man from political and economic tyranny. He particularly praised small farmers as "the most valuable citizens.") However, Jefferson did not change Hamilton's basic policies. As president in 1811 Madison let the bank charter expire, but the War of 1812 proved the need for a national bank and Madison reversed positions. The Second Bank of the United States was established in 1816, with a 20 year charter.

The War of 1812, by cutting off almost all foreign trade, created a home market for goods made in the U.S. (even if they were more expensive), changing an early tendency toward free trade into a protectionism characterized by nationalism and protective tariffs. The experience of this war led the War Department to issue a request for contract proposals for firearms with interchangeable parts. Previously, parts from one firearm had to be carefully hand-fitted to another firearm; almost all infantry regiments necessarily included an artificer or armorer who could perform this intricate gunsmithing. The requirement for interchangeable parts forced forward the development of modern metal-working machine tools, including milling machines, grinders, shapers and planers. The development of these modern machine tools made possible the development of modern industry capable of mass production.

From the 1830s to 1860, Congress repeatedly rejected Whig calls for higher tariffs, and its policies of Economic nationalism, which included increased state control, regulation and macroeconomic development of infrastructure. President Andrew Jackson, for example, destroyed the Second Bank of the United States. The tariff was lowered time and again before the Civil War. Proposals to fund massive western railroad projects, or to give free land to homesteaders, were defeated by Southerners afraid these policies would strengthen the North. The Civil War changed everything.