On the morning of May 10, 1876, a crowd of nearly 200,000 people gathered in Fairmount Park on the western bank of the Schuylkill River in Philadelphia. It was the opening day of the Centennial International Exhibition — America’s first World’s Fair — and the largest public event the nation had ever staged.
Thirty-seven countries had sent delegations. Two hundred and forty-nine buildings had been constructed across 285 acres of parkland. The exhibition would run for six months and draw nearly ten million visitors — at a time when the entire population of the United States was roughly 45 million.
But the spectacle that people would remember — the image that would travel back to London, Berlin, Tokyo, St. Petersburg and change how the world thought about the United States — was inside a building called Machinery Hall.
Machinery Hall was the largest building in the world at the time. It covered 14 acres. And at its center stood the Corliss Steam Engine — a 700-ton, 1,400-horsepower mechanical colossus that rose forty feet above the exhibition floor.
The engine was connected to every machine in the building by a vast network of belts, shafts, and pulleys. When the Corliss ran, everything ran. When it stopped, everything stopped. It was the mechanical heart of American industry made visible.
President Ulysses S. Grant and Emperor Dom Pedro II of Brazil walked together to the engine’s platform and turned the valves. The Corliss shuddered, caught, and began to turn. Across 14 acres, hundreds of machines came alive simultaneously — looms weaving fabric, lathes cutting metal, printing presses rolling, pumps driving water.
The crowd, according to contemporary accounts, fell silent in a hushed awe. Then it erupted with cheers.
What the crowd witnessed that day was not just a technological marvel, as impressive as it was for that era. No, it was a statement. The Corliss Steam engine represented the American System.
Eighty-six years after Alexander Hamilton’s dinner with Thomas Jefferson, the United States was displaying industrial capacity that rivaled, and in many categories surpassed, Great Britain—the nation that had dominated global manufacturing since the dawn of the Industrial Revolution.
American steel. American locomotives. American machine tools. American sewing machines, typewriters, telegraphs, and agricultural equipment – all of it was the byproduct of the system Hamilton envisioned nearly a century prior.
Alexander Graham Bell demonstrated the telephone at the exhibition. Thomas Edison’s automatic telegraph was also on display. Remington showed off its typewriter. Singer featured its sewing machines. George Westinghouse displayed his air brake system for railroads.
Foreign delegations walked through Machinery Hall and understood, many of them for the first time, that the balance of industrial power in the world had shifted. America was no longer a young agrarian republic scratching out an existence between the Atlantic coast and the edge of what had become the Western frontier. Instead, America had become a manufacturing superpower.
Now, nobody at the exhibition would have called what they were looking at “the American System”, as Hamilton had many years earlier. The phrase had fallen out of common political usage by then, even though the system’s policies were still very much in force.
But the American System is exactly what was on display. What the world witnessed at the first World’s Fair in 1876 was Alexander Hamilton’s vision actualized.
And unlike the British colonial system, the American System didn’t seek to extract natural resources from its neighbors, keeping them perpetually indebted and subordinate. Thus, every foreign delegation walking through the exhibits in 1876 went home asking the same question: how do we replicate this?
The answer to that question would produce the most extraordinary period of global industrial development in human history. It would also produce a panic in the halls of British financial power that would reverberate over the coming decades.
But before we get that far, we need to understand what the American System actually was… not as a textbook abstraction, but as a set of specific, concrete policies designed to solve a specific, concrete problem.
A Survival Strategy, Not a Theory
In our first essay of this series, we dropped in on Alexander Hamilton’s dinner with Thomas Jefferson and James Madison in a Manhattan townhome in 1790. That dinner is what enabled Hamilton to lay the foundation of his system.
As we noted, Hamilton and Jefferson were political rivals. Each had very different visions for what America should be. That rivalry is played up in many historical accounts today, and we’re often given a cartoonish version of the story.
But what I’ve come to understand is that each man wanted largely the same thing – a land where Americans would be free and prosperous in a nation that was economically and politically sovereign. They just had different ideas about how to get there.
So when he was building out the foundations of the American System, Hamilton was not theorizing about economics. Nor was he just a big government shill, as he is sometimes depicted today. Instead, Hamilton was deeply concerned about what could only be described as a survival strategy.
In 1790, the United States was an agricultural economy that exported raw materials — primarily tobacco, cotton, and timber — and imported manufactured goods from Britain. The trade relationship was still almost perfectly colonial in structure, even though the political relationship had formally ended with the American Revolution.
American farmers grew the crops, but British merchants learned to manipulate the prices in London through financial contracts. Then British ships carried the goods… British banks financed the transactions… and British manufacturers sold the finished products back to American consumers at whatever price the market would bear.
Taken together, that was the British Empire’s financial extraction system in operation. There’s no evidence that it was a carefully constructed system, but the incentives aligned perfectly to make it hum.
We can think of it this way…
British banks and merchants provided the financing that American farmers needed to run large-scale farms – keeping the farmers perpetually in debt. The farmers would then export tobacco, cotton, and timber to Britain, paying British shipping operations for the privilege.
Then British manufacturers would produce finished goods and sell them back into American markets at a premium. At the same time, the farmers were on the hook for making interest payments on their debt back to British banks.
As a result, America was little more than the supplier of raw materials and a consumer market for finished goods. The British Empire’s system kept the bulk of the profits flowing to London.
Thus, the United States was politically independent, but still economically dependent upon British finance and British industry.
Both Hamilton and Jefferson understood this dynamic well. But where Jefferson sought economic independence through simple agrarian self-sufficiency, Hamilton envisioned an American industrial power that could grow to rival Britain.
If we look at Hamilton’s policies in this light, it’s clear that they were intended to break every link in the chain that made the American economy reliant on British finance and industry. That’s the foundation of the American System, and it rested upon five pillars.
The System’s Five Pillars
Hamilton’s first major initiative was the Bank of the United States, which was chartered in 1791. It’s important to note that this was not a central bank in the modern sense. It was a mixed public-private institution in that the federal government owned 20% and private shareholders owned 80%.
The purpose of the Bank of the United States was to create a sound national currency and provide credit to both the government and productive enterprises, creating an American-based capital market in the process.
I know this sounds like an early form of Keynesianism on the surface. But that’s only if we don’t examine the nuances.
The key to Hamilton’s national banking system was that the currency had to be sound with collateral backing, not something that could be created ex nihilo. Hamilton saw first-hand the dangers of unbacked fiat currency when he watched the Continental Congress’s currency hyperinflate during the American Revolution.
In addition, Hamilton was clear that the national banking system was to direct credit towards productive activity that created true economic value. It was very much aligned with Say’s Law, which effectively says that production creates its own demand. There was no Keynesian obsession with stimulating aggregate demand at all costs.
Today, those of us paying attention are very aware of all the corruption that’s been embedded in the banking system for a long time now. We tend to look at the national banking push as “bad” because we know that the American banking system was later captured and turned towards extraction.
However, I think it’s important to recognize that American farmers and businesses were already borrowing money from British banks at the time… and that kept the surplus capital flowing to the British economy. So Hamilton’s push wasn’t a deceptive effort to force bank credit upon Americans – it was an effort to displace the British banks so that capital formation could occur domestically.
Simply put, a national bank gave the United States its own credit system, independent of London and capable of financing domestic production on beneficial terms.
That’s why national banking was a major pillar of Hamilton’s American System. And as we discussed in the first essay of this series, creating a national banking system was predicated on having the federal government assume the wartime debts of the states.
So the assumption of state debts was also a key pillar of Hamilton’s system. This looked reckless to some of his contemporaries. But Hamilton wasn’t just paying off old debts… he used them to create an American capital market.
By consolidating the chaotic mess of state obligations into standardized, tradeable federal bonds, he gave investors — particularly Dutch and French banking houses — a reliable American security to buy. Then investment capital began flowing into the United States… and Hamilton’s national banking system would direct that capital towards productive activity.
Then there were the tariffs – which seemed to fly in the face of Adam Smith’s argument for free trade in The Wealth of Nations.
Hamilton’s argument for protective tariffs was devastating in its simplicity. His logic was that Britain had industrialized behind its own protectionist tariffs — the Navigation Acts, the Corn Laws, and various imperial preference systems that reserved British colonial markets for British manufacturers. Only after having industrialized, did Britain become the world’s leading advocate for free trade.
To Hamilton, this reeked of hypocrisy. In his view, free trade between a developed industrial nation and an agricultural nation always benefitted the developed nation because it kept capital flowing towards the developed economy… which prevented that capital from being used to develop the domestic economy.
Hamilton knew that American manufacturers lacked the capital and scale to compete directly with the established, well-capitalized British industrialists. He saw tariffs as the mechanism necessary to give fledgling American industry the chance to grow and develop.
So Hamilton viewed tariffs as a tool to help advance economic sovereignty. And he believed that they should be removed once the United States had developed to the point where American industry was competitive in global markets.
This is the argument that economist Friedrich List would later develop into a comprehensive theory. We’ll explore that more in a later essay.
That makes protective tariffs the third plank of the American System. Then came productive credit.
Hamilton insisted that the financial system should serve the productive economy, not the other way around. He was largely opposed to what we now call financialization.
That distinction — between productive credit and speculative credit — is perhaps the most important idea in the entire American System tradition, and the one most thoroughly erased from modern economic assessment.
The principle is straightforward.
A dollar lent to build a factory creates real wealth because the factory produces goods that are worth dramatically more than the raw materials that go into them.
Those goods then raise the standard of living for individuals in some capacity, thus people want to buy them. This generates the income the factory needs to repay its loan. Any surplus income can then be reinvested to expand production and engage in research and development (R&D).
Thus, this kind of loan is self-liquidating because it finances something productive. Theoretically, constant credit expansion within a system that only finances productive activity would not be a bad thing.
On the other hand, a dollar lent to speculate on land prices, commodity prices, luxury consumption, or other non-productive activity does not create new wealth. Instead, it merely redistributes existing claims on wealth from one speculator to another, with the banker collecting a fee at every turn.
The system’s final pillar was public infrastructure. Hamilton looked out over a continental nation with dispersed geography and knew that it would need roads, canals, and harbors to connect its markets.
And while a private entity could certainly build such infrastructure, none were stepping up to do so in the early days of the American Republic. That’s why Hamilton believed this infrastructure would have to be funded by the US Treasury.
Again, the key for Hamilton was that this infrastructure needed to enable and empower productive activity. He certainly didn’t advocate public works projects for their own sake – as later presidents would, sometimes pointing to Hamilton for justification.
Hamilton was very clear that all five pillars of the system must be rowing in the same direction – towards encouraging industrial development and building the domestic economy.
The result of that implementation was what the world saw in Machinery Hall in 1876 — and what it saw for the next two decades as American industrial production surpassed Britain’s in sector after sector.
The Role of Sound Money
Those of us schooled in Austrian economics consider sound money to be a foundational pillar of a healthy economy. Though it wasn’t a core focus of his American System, Hamilton considered sound money to be imperative as well… but he had a unique view of what sound money entailed.
The Austrian School suggests that sound money requires commodity backing of some kind (often gold). The reason, of course, is that commodity backing prevents inflation. That is to say, no government or bank can create new money from nothing if the money is fully backed by a commodity.
Hamilton did support a currency redeemable for specie (precious metals), but he wasn’t as rigidly concerned with commodity backing. To him, it was more about whether the credit system was directing capital toward productive activity rather than speculation.
In other words, he saw money’s soundness as the product of the system within which it operated.
In Hamilton’s view, a banking system that financed factories, farms, and infrastructure was operating on sound money, regardless of the system’s gold reserves. Conversely, a banking system that financed speculation and unproductive activity was operating on unsound money, regardless of how much gold it held.
This distinction is the key to understanding why the American System and the Global Financial Extraction System, as developed by the British Empire, are fundamentally different — even though both feature national banking and a centralized system of credit.
The financial extraction system was built on fractional reserve banking, which the Bank of England pioneered. That allowed banks to lend out multiples of the deposits they actually held.
Doing so creates credit out of thin air — and the interest collected on that created-from-nothing credit is the primary mechanism by which the banking system extracts wealth from the productive economy.
When credit expands, asset prices inflate, and speculators profit. When credit contracts — as it inevitably must — productive enterprises fail and their assets are acquired at distressed prices by those who are closest to the engines of financialization.
Thus, as the great Austrian economists pointed out, the boom-bust cycle that has characterized the global economy since the 18th century is not a natural phenomenon. It is the direct, predictable consequence of a banking system designed to create credit beyond real savings and extract rent from the resulting instability.
While he didn’t approach it from the Austrian view, Hamilton’s system was designed to prevent exactly this.
At its origin, the Bank of the United States was constrained in its credit creation. And its explicit purpose was to direct capital toward productive investment — not to generate fees from speculation. To Hamilton, the difference between these two approaches to banking was the difference between building an economy and strip-mining one.
The System Spreads
What happened after 1876 is the part of the story that makes the American System’s disappearance from common knowledge so remarkable.
In short, the system didn’t just work in America… it worked everywhere it was tried. And it was tried — consciously, deliberately, and by name — across the industrializing world.
Japan’s Meiji Restoration is the most dramatic example.
In 1868, Japan was a feudal society. The economy was almost entirely agricultural and Samurai still walked the land carrying swords.
Then Japanese officials visited the United States and Europe to examine different models of industrial development, and they chose to implement the American System: protective tariffs on manufactured imports, government-directed investment in strategic industries, national banking to channel credit toward industrialization, and massive infrastructure development, including railroads and telegraph lines.
Within a single generation, Japan transformed itself into a modern industrial power that became the marvel of the world… using the American System.
While Japan’s implementation was the most dramatic, the newly unified Germany under Bismarck also employed the system in 1871 to industrialize with extraordinary speed.
By the 1890s, German steel production rivaled Britain’s. Meanwhile, the German chemical and electrical industries led the world. And German universities were producing the scientists and engineers who would define the 20th century.
Count Sergei Witte, the economic minister to the last tsar of Russia, was also an explicit student of American System economics. Using its pillars, Witte drove the construction of the Trans-Siberian Railway and directed industrial development.
As a result, Russia’s industrial output grew dramatically in the 1890s and early 1900s… until the Bolshevik revolution would undo all of it. Curiously, the Bolsheviks appear to have been funded by high-level financiers connected to London and New York in some capacity.
In addition, France and Italy each had American System advocates who helped drive industrial development in the early to mid-20th century.
The pattern appears to be consistent – those nations that adopted the American System’s core principles — protective tariffs during development, directed credit toward productive investment, public infrastructure to connect markets — achieved rapid industrial growth.
Meanwhile, those nations that remained dependent upon foreign financing remained undeveloped exporters of raw materials and experienced minimal economic growth.
Now, I’m just looking at the evidence of economic growth and industrial development here. I don’t mean to support any of the political policies that any of these nations advocated while they were utilizing the American System. To be sure, many of their political policies were not at all aligned with the decidedly American concept of individual liberty.
But if we strip out the overtly political stuff, it becomes clear that the American System wasn’t just a 19th-century American phenomenon. It appears to have worked quite well everywhere it was tried – at least from the standpoint of building a competitive industrial economy capable of raising the standards of living for the native population.
This is where the story becomes either uncomfortable or quite fascinating, depending on one’s perspective…
The Obvious Question
The historical record shows that the American Systembuilt the world’s most powerful industrial nation out of a hodge-podge collection of former British colonies that had effectively bankrupted themselves during the Revolutionary War.
After America’s rise as an industrial power, the world took notice and numerous other countries employed the same principles with dramatic success.
So if we assess the American System purely from an economic perspective, it clearly works to help a country develop an advanced domestic economy – as long as there is political stability in place.
Now I don’t mean to imply that economic growth is the end goal of humanity, but I do see it as a desirable goal. It has enabled us to largely conquer scarcity and create a world of abundance – at least for those of us in developed countries today.
And as Spencer Heath pointed out in his Economics and the Spiritual Life of Free Men, the abundance created by economic growth also enables people to pursue higher ideals as well – whatever they consider those to be.
That being the case, why did knowledge of the American System seemingly disappear? And why are the economists who helped develop Hamilton’s original pillars more obscure today than most of the classical, Keynesian, and Austrian economists?
I studied mainstream Keynesian economics in my college days… and then I leveled up by discovering the Austrian school. I spent two years doing nothing but read Austrian texts, and I’ve continued my education ever since.
Still, I had never heard of Friedrich List or his National System of Political Economy — which was considered to be the most important economics book of the 19th century. Nor had I heard of Henry Carey, who was considered the most prominent American economist of the Civil War era.
How is it that I could easily discover Murray Rothbard, whose work challenged the entire existence of government itself, but record of the American System economists seemed to be non-existent?
Perhaps it’s just circumstance… but I’m fascinated by this question.
By the 1870s, the American System was winning. The United States was surpassing Britain industrially, and other nations were adopting the model and achieving strong results. The British financial system, which morphed into the Global Financial Extraction System, was facing the most serious challenge to its dominance since the American Revolution.
But by 1913, powerful financial interests found their way inside the gates and gradually captured the American monetary system. Then they rewrote the financial architecture, and they systematically restructured the banking system to serve financial extraction rather than productive development.
How they did it — and what it cost the American middle class — is a story we’ll explore in a future essay in this series. It was Jefferson’s greatest fear come true… more than a century later.
Still, the American System’s accomplishments are undeniable with regards to building an advanced economy. We’ll explore the economists who advanced Hamilton’s principles in later eras in our next installment of this series.
-Joe Withrow
P.S. Episode 4 of the Phoenician League podcast dropped earlier this week, and it details my foray into the investment research world. I attribute all of my professional development today to that experience… but it did not end well.
If you would like to tune in and join the conversation, the podcast is available on all the major platforms. This includes Apple Podcasts, Spotify, and all the others. The video version is available on our YouTube channel as well.
Alternatively, you can catch every episode after it has published at: https://phoenicianleague.com/podcast