The American System

Senator Henry Clay of Kentucky is considered the architect of the “American System,” the first government-sponsored attempt to invigorate the national economy.  Not a “system” in the true sense of the word, the American System was really a series of plans for strengthening the infrastructure and financial institutions of the United States.  The plan included:

The system was an attempt to bring Alexander Hamilton’s proposals to fruition, as outlined in his 1792 “Report on Manufacturers.”

The Northeast benefited greatly from the American System because industry was beginning to grow in the region and good transportation routes were needed to move products and supplies around.   But the American system did not offer much to the South where little industrial growth was occurring and navigable rivers provided easy transportation routes for farmers and planters moving their crops to markets. 

Tariffs and Internal Improvements

As proposed under the American System, a protective tariff of 20 to 25 percent on imported goods—such as woolens, cottons, leather, fur, hats, paper, sugar and candy—would protect the nation’s fledgling industries from foreign competition.  Congress passed a tariff in 1816 that increased the price of European goods, which encouraged consumers to buy less expensive American-made goods.    

Clay argued that America has a “great diversity of interests,” from agriculture and fishing to manufacturing, shipbuilding, and commerce and that the “good of each...and of the whole should be carefully consulted.”  Clay believed that stimulating manufacturing would create a demand for western raw materials and as westerners grew more affluent, they would purchase eastern manufactured goods. 

To move products and materials between western and eastern states efficiently, the government looked to improve the country ’s infrastructure, particularly its transportation routes.  Improved roads and canals would facilitate commerce, speeding it up and making it less costly. 

Bank of the United States

Congress chartered the first Bank of the United States in 1791.   The charter lasted twenty years and gave the Bank the power to meet the financial needs of the newly formed government.  Supported mainly by northern merchants and the New England states, southern states eyed the Bank with suspicion because agriculture formed the basis of the southern economy and it did not require the concentrated capital that northern industries needed to succeed. 

When the Bank ’s charter expired, the Democratic-government refused to extend its charter, claiming it was unconstitutional.  With no centralized banking system in place, the government found it difficult to finance the War of 1812.  Five years later, the Second Bank of the United States was chartered, primarily to stabilize the country’s currency.  Patterned after the first, the Bank established branches in several states.

The Bank remained politically controversial throughout the period, especially following the economic downturn of the Panic of 1819.   Critics complained that the bank was corrupt and that it had mismanaged funds, promoting detrimental conservative policies.  Several states enacted legislation that levied taxes to restrict the Bank’s power.  For example, Maryland imposed a tax on the bank’s operations, a move that led to the Supreme Court case McCulloch v. Maryland, where the Supreme Court denied Maryland’s ability to tax the bank, claiming it unconstitutional.  Despite this, the Bank remained controversial and President Andrew Jackson repealed its charter in 1832.