"Some ideas are so bad we are doomed to relive them with each
successive generation. Until recently, economic central planning from
the political right received far less attention than its well-known
manifestations on the left. Think of all the repeated attempts to
rehabilitate Marxism and socialism, despite their disastrous track
record over the last century. Unfortunately, an emerging faction on the
political right has decided to deploy economic planning of their own as
an intended countermeasure against their progressive foes. For
inspiration, they’ve resurrected a failed and long-forgotten idea from
the 19th century: Henry Clay’s “American System.”
Clay’s program was first articulated in an 1824 speech,
in which he proposed using the Constitution’s tax and regulatory powers
to execute America’s first national foray into centralized economic
planning. His basic idea was to enlist the might of the federal
government to strategically develop certain sectors of the American
economy by subsidizing them with tax dollars, and penalizing their
foreign competitors with high protective tariffs.
Clay maintained that import tariffs could be used to give American
manufacturers a leg up over European goods, while also cultivating
“infant industries” that he deemed to be in the young nation’s strategic
interests. Topping off the package, Clay proposed a spending spree on
federally subsidized “internal improvements,” such as roads and canals
to facilitate internal commerce, and a strong central bank to facilitate
the financing of large government programs through the issuance of
sovereign debt. In total, the program amounted to a comprehensive
attempt at economic planning around the mistaken belief that trade is a
zero-sum game, and countries were locked in a continuous struggle to
maximize their industrial outputs by subsidizing themselves and taxing
their perceived foreign competitors.
If all of this sounds vaguely familiar, it should. It’s part of the
protectionist-tariff playbook we witnessed during the Trump presidency.
Or maybe it’s better seen, as William Galston asserts,
as representing “an effort to bring some ideological coherence to the
impulses Donald Trump represents—nationalism, isolationism, social
conservatism, and hostility to immigration.” Indeed, Robert Lighthizer,
the former Trump cabinet official who was responsible for international
trade policy, recently called for the adoption of a “New American System”
based on Clay’s 1824 proposal at a speech in Washington, D.C. Henry
Clay’s scheme similarly assumed center stage at the recent National
Conservatism Conference in Miami, Florida, when historian Michael Lind
depicted him as the true successor to the American founding, by way of
Alexander Hamilton. Clay’s ideas have also found an institutional home
at the American Compass, a think tank set up by Oren Cass,
Mitt Romney’s former economic advisor. It would be difficult to
overstate the rapid pace at which Clay’s ideas have surged out of
obscurity and into political discussions on the right. Barely two
decades ago, discussions of it were almost entirely relegated to the peripheral fringes of American politics. Today, Florida Senator Marco Rubio invokes Clay as a model for constructing a US industrial policy to counter the economic rise of China.
The fundamental problem with this line of reasoning is that it rests on bad economic history, overlaid with the logical fallacy post hoc ergo propter hoc.
The “new American System” advocates tell a version of US economic
history that goes something like this. In the early 19th century, the
United States entered the world scene as an economic backwater facing
insurmountable competition from the established industrial nations of
Europe, and particularly Great Britain. By the turn of the twentieth
century, the United States had emerged as one of the world’s great
industrial powers, even surpassing the Old World despite getting a later
start. The credit for this growth, they claim, goes to the “American
System” policies that Clay championed: high protective tariffs,
subsidized “internal improvements,” the gradual expansion of a powerful
central bank, and all around economic planning.
Even the basic claims of this story are in error. As economist Douglas Irwin has shown,
proponents of the theory that tariffs drove American economic growth
“have tended to present statistics that overstate late nineteenth
century US growth in comparison to other periods and countries.” After
examining the empirical evidence, Irwin concludes, “It is difficult to
attribute much of a positive role for the tariff because import tariffs
probably raised the price of imported capital goods, thereby
discouraging capital accumulation.” He accordingly rules out the theory
that trade protection, the main plank of Clay’s platform, caused the
United States to become a world economic power.
But there are even-more-fundamental problems with the new “American
System” theorists’ history. They get basic facts wrong about the nature
of 19th century economic policy, while simultaneously obscuring or
ignoring the many downsides of Clay’s program and its attempted
implementation.
The Rise and Demise of the American System
Though once a popular political slogan, Clay’s American System fell
into disrepute after a series of discrediting blows in the 19th and
early 20th centuries. The first came in 1832, when President Andrew
Jackson vetoed legislation to recharter the United States’
corruption-plagued central bank. The creation of the Federal Reserve in
1913 resuscitated this legacy, along with its tendency to engage in
political manipulation of monetary policy, though the Bank War did manage to constrain the push for centralization on that front for much of the 19th century.
Clay’s original tariff program endured a bit longer, finding
legislative support at various points between 1824 and 1930. As the
chart below shows, however, the 19th century was not an uninterrupted
experiment in Clay-style protectionism. Clay only briefly got his way
when a series of tariff measures between 1824 and 1828 jacked the
average rate on dutiable goods to over 60 percent. The “Tariff of Abominations,”
as the 1828 measure came to be known, sparked a political crisis that
brought the country to the brink of disunion, after South Carolina
attempted to nullify the high tax measure. As the graph shows, from 1833
until the Civil War, the United States charted a course of tariff
liberalization, save for a brief interruption when Clay’s Whig Party
attained power in 1842. In fact, in 1846 US Treasury Secretary Robert
Walker orchestrated a major tariff liberalization to coincide with Great
Britain’s famous repeal of the protectionist Corn Laws that same year.
The United States did not reimpose high tariffs in the Clay model
with any degree of permanence until the second half of the nineteenth
century. While this period did coincide with economic growth, the claim
of a causal relationship ignores the fact that the American economic
ascendance was already well underway, preceding those tariffs by several
decades, and getting its start in a time of relative trade
liberalization on both sides of the Atlantic.
One of the main reasons Henry Clay struggled to get his American
System launched in his own lifetime (1777-1852) was the political
corruption it always attracted. In practice, the American System’s
rationalization of trade protectionism provided cover for rampant graft
and favoritism. From the moment of its inception, politically connected special interests seized control of federal tariff legislation
and reshaped it to their own benefit. They lobbied for punitive tax
rates on their competitors and pork-laden handouts for themselves, even
if it meant overtaxing commerce at the expense of revenue itself. At several points in the 19th century, protectionist tariffs pushed the US tax system into the upper half of the Laffer Curve,
where rates became so onerous that they undermined the intake of
federal tax revenue. This was by design, as protectionist tariffs use
taxes as a weapon to deter foreign goods from even entering the country.
The American System and Slavery
Clay’s American System also struggled to disentangle its doctrines
from the institution of slavery. Its underlying theory held that the
American economy could be “harmonized”
and internally integrated through national economic planning. That
meant deploying “internal improvements” and the tariff schedule to bind
northern industry and southern agriculture together in economic
symbiosis. Clay’s doctrines amounted to an early experiment in import substitution:
the strategy of using tariffs and other commercial restrictions to
divert raw-material production away from international markets and into a
heavily subsidized domestic industry. In practice, this meant
intentionally shifting southern cotton production away from
transatlantic markets and into the textile mills of New England. In
order for the American System to function as intended, it would have to
subsidize plantation agriculture as well as northern industry.
Some of the American System’s proponents, including Clay himself,
eventually recognized that a full “harmonization” of the US economy
under the American System would entail significant public expenditures
to develop southern agriculture, thereby politically entrenching slavery
in perpetuity. Clay (who, despite being a slave-owner, had reservations
about the institution) therefore devised what is often referred to as
the “Whig formula” for addressing slavery through a scheme of federally
compensated gradual emancipation.
To facilitate this program, Clay appended the American System doctrine with another plank.
In addition to paying for “internal improvements,” federal land sale
revenue would be allocated to “colonize” or resettle the
African-American population of the United States in faraway tropical
locations such as Liberia or Central America. As Clay explained in an
1847 speech, federally subsidized colonization “obviated one of the
greatest objections which was made to gradual emancipation,” that being
the “continuance of the emancipated slaves among us.” Following Clay,
American System theorists such as economists Mathew Carey and his son
Henry C. Carey began to champion the black colonization movement as a
“solution” to the problems that slavery presented to their tariff and
subsidy scheme. In order to make the system work without plantation
slavery, they would simply export the freed slaves abroad.
Aside from a few experiments such as the founding of Liberia,
such schemes proved impractical, and eventually succumbed to political
obstacles during the American Civil War. Clay’s tariff system
nonetheless gained a foothold on the eve of the war, as protectionist
interests exploited the chaotic “secession winter” legislative session
of 1860-61 to cram the pork-laden Morrill Tariff Act through Congress.
A Civil War Diplomatic Disaster
Although the Morrill Tariff succeeded in finally installing an
American-System-style tariff regime for the next half-century, it
quickly turned into a diplomatic disaster. The new law’s steep
protectionist rates alienated the British government, which would
otherwise have been a natural anti-slavery ally to the Union cause. At
the outbreak of the war, British abolitionist and free-trader Richard
Cobden wrote his friend Charles Sumner, the US Senator from
Massachusetts, to plead the importance of free trade to the anti-slavery
cause. “In your case we observe a mighty quarrel: on one side
protectionists, on the other slave-owners.” Citing the Morrill Tariff
supporters’ publicly expressed reluctance to move against slavery,
Cobden predicted the measure would imperil his efforts to steer Britain
to the aid of the North. As he rhetorically asked his fellow
abolitionist Sumner, “Need you wonder at the confusion in John Bull’s
poor head?”
As part of the fallout, the Lincoln administration entered the White
House facing an irate diplomatic landscape. In part alienated by the
tariff, Britain adopted a stance of neutrality toward the two American
belligerents. After successive missteps
further soured the Lincoln Administration’s relationship with London,
abolitionists such as Cobden had to mobilize opinion on the British
homefront against the Confederacy by reminding people of slavery’s
central role in the war. The diplomatic row, which began with an
ill-conceived and opportunistic tariff bill on the eve of Lincoln’s
inauguration, would plague US-UK relations for decades to come. Its
wartime effect thrust the incoming administration into a needlessly
hostile diplomatic situation, handicapping the Union’s war efforts from
abroad.
As a domestic economic policy, the Morrill Tariff served a slew of
special interests in the northeast by placing punitive taxes on their
competitors. It did not finance the Union war effort (as is often
incorrectly claimed by American System enthusiasts) as it was never
intended for the purpose of raising revenue. The Morrill Tariff
primarily aimed to deter commerce from abroad at the behest of domestic
manufacturing, allowing them to capture increased prices on their own
goods. As a war measure, it amounted to a self-inflicted wound by
alienating Britain from the Union’s cause.
How Clay’s Tariffs Gave Us the Income Tax
After the Civil War, the tariff issue came to dominate American
economic policy. Until 1909, the successors to Clay’s “American System”
generally enjoyed the upper hand. That year, President William Howard
Taft called for a routine revision to the federal tariff schedule that
quickly devolved into a corrupt free-for-all of tariff favoritism and
special-interest handouts.
Amidst the backlash against the Payne-Aldrich Tariff Act’s
special-interest free-for-all, a coalition of free trade Democrats and
breakaway Republican “insurgents” in the US Senate turned to a radical
solution. Realizing that they would never break the monied interests of
the protectionist lobby, they proposed restructuring the entire federal
tax system by shifting it away from the corruption-prone tariff
schedule. The result was the 16th Amendment,
a flanking move that tried to substitute the protective tariff system
with the federal income tax. The amendment, one legislator boasted at
the time, would serve as a “club to beat down the tariff” by separating
the federal tax system from the entrenched protectionist lobby.
For a fleeting moment, the strategy worked. In 1913, Congress cut
import tariffs to their lowest point since the 1850s, and imposed a
modest income tax to make up for the loss of revenue. The
special-interest groups quickly reconstituted though, and in 1922 they
succeeded in exploiting an economic downturn in the agriculture sector
to make the case for renewed protectionism. Since the income tax already
provided the lion’s share of tax revenue, lawmakers no longer had to
worry themselves about jacking up tariff rates to prohibitive levels. As
a result of this post-World War I resurrection of Clay’s “American
System,” the United States ended up with the worst of both worlds: high
tariffs to raise the prices on imported goods at the behest of their
domestic competitors, and a new federal income tax to extract revenue
from them at every opportunity.
When Americans complete their income tax filings today, few realize
that the interminable frustrations of this annual ritual have their
origins in a now-obscure tariff bill. It was the corrupt overreach of
Clay’s “American System,” though, that ultimately bequeathed us with the
modern IRS.
Smoot-Hawley and the Collapse of Clay’s Doctrine
The legislative progeny of Henry Clay’s doctrines finally came to a
catastrophic head in 1930 when Congress enacted the Smoot-Hawley Tariff.
The measure passed in a desperate attempt to shield special interests
from the 1929 stock market crash, although its legislative origin
predated “Black Monday” – October 28, 1929 – by several months. The
congressional record shows that Smoot-Hawley took its direct inspiration
from Clay’s doctrines. The debate on the bill commenced in the House of
Representatives earlier that May. Making the case for the protectionist
side, Rep. Hamilton Fish (R-NY) declared that “the Republican Party has
just one viewpoint, and that is to protect American labor and American
industry, not through a competitive tariff but through a tariff that
actually protects.” To reinforce his point, Fish quoted “a brief extract
from a speech of Henry Clay in favor of a protective tariff…which has
never been improved on and has constituted the Republican tariff
doctrine for the past 70 years.” After quoting Clay’s American System
speech from 1824, Fish offered his rationale for adopting a renewed
protectionist policy in 1929. It reads like a talking point from Oren
Cass’s American Compass today:
The prosperity of this Nation has been built up because the
Republican Party has hewed to the line to protect American labor and
American industry and to conserve the home markets from ruinous
competition with the low-paid labor in foreign countries.;
In a prescient response, another representative challenged Fish by
warning that a tariff hike could lead to economic turmoil, including
triggering a harmful turn in already-uneasy unemployment numbers. If the
tariff passed, was Fish ready to take “credit for the general condition
of unemployment that now exists in the United States?” After
dissembling over particular, contested tariff rates and the need to
serve a multitude of special interest constituencies, Fish reiterated
the philosophical justification for pushing ahead. He again invoked
Henry Clay’s American System:
That principle was laid down by Henry Clay-the principle of
protecting the home market. It is just the reverse of the English
attitude. They export 90 percent and only absorb 10 percent of their
products in their own home market: We consume in this country 90 percent
of our home product and export 10 percent. The question is simply
whether you prefer to conserve the home market and protect American wage
earners or let the products of low-paid foreign labor destroy the home
market for the American producer.
The stock market crash in October poured gasoline onto an
already-burning fire as the Smoot-Hawley bill progressed through
Congress. The pork-barrel free-for-all saw money changing hands between
lobbyists and legislators on the floor of the committee rooms, as
industry after industry attempted to purchase “protection” for itself
from the unfolding economic recession. They thought they were weathering
the storm by obtaining legislative favors. Instead, the cumulative
hikes of Smoot-Hawley boosted tariff rates to a historic high of almost
60 percent on all dutiable goods entering the United States. The measure
provoked a wave of retaliatory protectionism across the world. In just
four short years, Smoot-Hawley had inadvertently triggered a global
collapse in international commerce.
The effects may be seen in the famous “spiral” graph published by the League of Nations’ World Economic Survey in 1933.
By pursuing the course advised under the “American System” doctrine,
the United States directly helped to put the “Great” in “Great
Depression.”
Repeating Old Mistakes
The National Conservative argument for the “American System”
correctly observes that there were moments in United States history when
the country largely adhered to Henry Clay’s suite of high protectionist
tariffs, public works projects, and allegedly strategic industrial
subsidies. They also choose to deemphasize, or may even remain ignorant
of, the American System’s more ignominious legacies. You will seldom
encounter, for example, a NatCon who seriously engages with the moral
conundrum that slavery created for Clay’s import-substitution scheme
before the Civil War. The American System’s colonization plank is almost
entirely absent from these discussions, and its propensity for
attracting graft and corruption in its later iterations is almost always
swept under the rug.
Instead, the version they present is an idealized form of seamlessly
executed economic planning, albeit for “strategic” purposes in the
“national interest” instead of the left’s usual litany of social justice
causes. The inherent coordination problems of centralized economic
planning do not simply melt away when it is directed at nationalist
objectives instead of progressive, redistributive goals.
But there’s an even-more-fundamental problem with the American System
narrative. Its modern rehabilitators conveniently leave out the fact
that every time it was tried in the 19th and early 20th centuries,
Clay’s program unleashed a torrent of preventable policy disasters.
In 1828, a protective tariff pushed the country to the brink of
disunion while also demonstrating Clay’s own inability to extricate his
program from the slave economy. In 1861, Clay’s economic philosophy
triggered a diplomatic crisis with Britain that unwittingly alienated an
anti-slavery ally from the Union cause. In 1909, the heirs of Clay’s
economics became so thoroughly beholden to the corrupt dealings of the
tariff lobby that a section of their own party revolted and ushered in
the haphazardly designed federal income tax system that plagues us to
this day. And in 1930, Clay’s political progeny steered the country
directly into economic ruin by embracing an American-System-inspired
tariff program as its main countermeasure to the unfolding Great
Depression. While Clay’s latter-day advocates jump at every opportunity
to credit him for late-19th-century American economic growth despite a
weak empirical basis for the claim, they also conveniently omit the
track record of real and tangible blunders that followed from a century
of experiments in American System economic policy.
In the case of the Clay-inspired Smoot-Hawley Tariff, the resulting
collapse in international trade proved so disastrous that it largely
expunged the American System’s advocates from both political parties in
the post-war 20th century. Starting with the Reciprocal Trade Agreement
Act in 1934, Congress embarked on a slow-but-steady retreat from
protectionism that continued until the early 2000s. The passage of time
has, unfortunately, dampened our memory of Smoot-Hawley’s self-inflicted
wounds, to say nothing of Clay’s 19th-century failings. Now the
National Conservatives deceive themselves into believing that they have
rediscovered hidden knowledge from our economic past: knowledge that
will allow them to beat the central planners of the left by putting
their own spin on central planning from the right. In reality, they risk
haplessly stumbling into the same mistakes that discredited Clay’s
American System in the eyes of the last generation to experience its
results.
America’s progressive left have always, either tacitly or by
expression, bought into the impulses of economic planning. The shocking
thing happening now is that we have conservative participation in the
American System too, and why wouldn’t we? Tariffs are a dyed in the wool
winner for anyone who wants to push them onto the American people.
Those people never seem all that interested in getting past the emotive
costume of tariffs. “Let the other guy, the foreigner, pay the bill for a
change.” That tariffs are coming back around to steal all kinds of
American wealth never quite makes the evening news.
So elements of the right have jumped onto this centrally planned
economic train. And why wouldn’t they? There are illusions of easy
political wins to be had. And that’s all you really need to know."
