The American System (page 2)
The American System
The U.S. economy really began to take shape in the first quarter of the nineteenth century. Congress had refused to renew the charter of the Bank of the United States in 1811, which meant that the government had to look to state banks for funds to repay the debt of the War of 1812. Since state banks did not always have sufficient gold or silver to back up their paper currency, other banks would often refuse to honor that currency. Speaker of the House Henry Clay of Kentucky offered a solution to this emerging economic crisis. His proposal, called the American System, found substantial support in Congress. It consisted of three parts: a national bank, protective tariffs on imports, and a national transportation system.
The National Bank
In 1816, Congress sent a bill to President Madison, asking for a charter for the Second Bank of the United States. Its purposes would be twofold: to establish a standard national currency and to fund federal government services such as the armed forces. Madison promptly signed the bill into law.
In 1818, the Second Bank called in all outstanding loans from state banks. These banks had borrowed more money than they could pay back, and the result was the Panic of 1819. In a frantic attempt to get enough money to pay their debt to the government, banks foreclosed on mortgages and called in loans to customers. In their turn, individual borrowers could not pay back the loans on such short notice, and many had to sell their homes or businesses. With no one to buy the businesses, they closed down, and their workers were suddenly unemployed. The resulting economic depression lasted for several years.
President Andrew Jackson looked with disfavor on the Second Bank, believing that it catered to the interests of the wealthy at the expense of the common working people. The voters apparently agreed with Jackson; when the fate of the bank became a major campaign issue in 1836, Jackson easily defeated his opponent, Henry Clay, who supported renewing the bank’s charter. Once reelected, Jackson took steps to close down the Second Bank. He transferred funds to various state banks rather than putting them into the federal bank. Bank President Nicholas Biddle attempted to save the bank by triggering a financial crisis, hoping to show Jackson and the public that they should sup- port an institution that stabilized the national economy. Neither Jackson nor the public was converted to this view; instead, they felt that Biddle was demonstrating conclusively that the bank was a tool to be used against the public.
The bank closed down in 1836, triggering the Panic of 1837. State banks loaned money readily, which meant that speculators were able to buy land. They resold the land at inflated prices, clearing a fast profit. As land prices soared, so did all other prices. President Jackson tried to stem the tide of inflation by stating that the federal government would accept only gold or silver as payment for public land—no paper currency would be accepted. Land sales dropped precipitously, because few people had gold or silver. They tried to trade paper money for gold and silver at the banks, and the banks quickly ran out and then failed. The Panic of 1837 resulted in an economic depression from which the nation did not begin to recover until 1843.
The Tariff Acts
A tariff is a tax or duty on imported goods. The idea behind a protective tariff is to drive up the prices of imports so that people will purchase goods made in their own country. Buying locally, of course, benefits the local economy.
The Tariff Act of 1816 established a 25% tax on imported manufactured goods. This drove up the price of imports to such a degree that southern planters protested, afraid that European nations would retaliate by taxing American cotton. However, northerners were happy to avoid the tariff by purchasing goods from their own factories, thus increasing their own profits.
In 1828, a new Tariff Act doubled the rates set in the Tariff Act of 1816. Southerners had not supported the first act, and thus were furious over the new one. They began muttering about the infringement of the federal government on states’ rights. John C. Calhoun, who had originally supported the use of the import taxes to pay for the roads and canals, wrote an essay arguing that no state should be forced to obey any act of Congress that it believed to be unconstitutional. Since the states had created the federal government, the states should have greater power. The position Calhoun took in his essay became known as the doctrine of nullification.
Many voters agreed with Calhoun. Henry Clay, ever the compromiser, successfully urged Congress to pass a reduction in the new tariff. For southerners, this was not enough. South Carolina took the lead, passing resolutions declaring the Tariff Acts null and void and refusing to pay any tariffs to the federal government. If the government tried to collect tariffs, South Carolina would secede from the United States. Clay urged a further compromise one that lowered the tariff rates gradually over the course of ten years. Satisfied for the moment, South Carolina dropped its threats. The tension during this period is known as the Nullification Crisis.
The national transportation system had three elements: paved interstate roads, canals, and the railroad. The idea behind the system was to link the agricultural and industrial regions, so that both would benefit economically.
Congress decided to use Tariff Act income to fund new roads and canals. The National Road was begun in 1815 and the Erie Canal in 1817. Within eight years, this 363-mile canal provided a direct and efficient trade route from the Hudson River to Lake Erie.
Railway locomotives came into use in the United States around 1830. The first steam-powered “iron horses” were slow and ponderous; one even lost a race to a flesh-and-blood horse. However, mechanical knowledge advanced quickly, and the train could soon move much faster than any animal. By 1850, American trains were running over thousands of miles of track; by 1869, the railroad reached from New York all the way to California.
The transportation boom created new markets for goods. Before the development of steamboats that could take goods upstream and canals that could carry goods inland from the ocean, most trade had been in local markets. Now sellers could expand into new territories and sell to thousands of new customers. This created a market revolution. As profits grew, so did the sizes of towns and the movement of settlers. Skilled artisans who manufactured items one at a time began to give way to mass production and factories.
Practice questions for these concepts can be found at:
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