Economic Conditions

The War of 1812 made apparent many of the flaws in American economic institutions due to the chaos the war caused in banking and transportation. The result was that many of these problems became major political issues in the years immediately following the war. Congressmen, namely Henry Clay, would work to create better systems that would streamline the nation's financial institutions. There were three major issues in need of particular attention. These were the lack of a national banking system, the need for a protective tariff, and the inadequate transportation systems of the time.

A Second National Bank

The charter for the first National Bank, which had been created by Alexander Hamilton, expired in 1811 and no efforts were made to create a successor for the institution. However, without a National Bank to control America's currency the banking system quickly became unstable. State banks took over control of most of the nation's currency and began to issue bank notes, but the value of these notes fluctuated depending on the standing of the bank from which they came. All of these different notes with different values made for a very confusing system.

By 1816, Congress realized that the National Bank should be rechartered and created the Second Bank of the United States. Similar to its predecessor, it was given a large amount of capital which enabled it to control the state banks to a certain extent. By keeping the state banks in check and stabilizing the value of bank notes throughout the country, the bank helped to create a more reliable banking system in America.

Protecting Domestic Industry

 Lowell's power loom helped to stimulate the Northeastern textile industry.
Lowell's power loom helped to stimulate the Northeastern textile industry.

With access to British manufactured goods cut off during the war, America saw a rise in its manufacturing capacity, particularly in the Northeast. These developments were centered around the textile industry and were made possible by a variety of technological and business innovations, such as Francis Cabot Lowell's invention of the power loom and establishment of an efficient mill for spinning and weaving at Waltham, Massachusetts. These were the beginnings of industrialization in America.

However, this progress was threatened following the war as British manufactured goods once again became available Americans. Wanting to prevent the young American businesses from gaining too much ground, British companies sold their goods at very low prices, virtually ensuring that customers would prefer them to the costlier American-made products. American manufacturers insisted that they needed protection if they were to face this onslaught of underpriced British goods, and the nationalistic protectionists in Congress responded. Despite objections from more agriculturally-centered regions, Congress won passage of a tariff law in 1816 that would protect the growing American industry.

Improving Transportation

River steamboats revolutionized the transportation of goods along the Mississippi.
River steamboats revolutionized the transportation of goods along the Mississippi.

The War of 1812 had made it clear that America's transportation systems were in need of some improvements. Now with the increase in manufacturing there was an added pressure to improve transportation to more easily facilitate the movement of raw materials to manufacturing centers and finished goods to domestic markets. At this time most transportation projects were financed by state governments or private interests, rather than the federal government (see Internal Improvements, next section). However, this did not mean that progress was not made in the early nineteenth century.

One form of transportation that was quickly expanding was turnpikes. The most famous of these, the Lancaster pike, was funded by the state of Pennsylvania and received heavy traffic that included the transportation of textiles. Another major development was the increasing use of steamboats along rivers and in the Great Lakes. Steam-powered ships became common for shipping goods along the Mississippi and Ohio Rivers, and helped to connect the regions of the American economy. Manufacturers found it easier to ship their finished goods to western markets and agricultural communities were now able to ship their crops to distant regions. However, despite these advancements there were still several problems with American transportation systems, which would lead to a debate over the role of the federal government in the matter.

Debating Internal Improvements

When Completed, the National Road stretched from Maryland to Illinois.
When Completed, the National Road stretched from Maryland to Illinois.

For many years people had supported the idea of federally-funded transportation improvements. This is best shown by the approval for the construction of a National Road during Jefferson's term as president. Using revenue from the sale of land in Ohio, the government arranged for the construction of a gravel road connecting the Potomac and Ohio Rivers, which was completed in 1818. However, there remained questions as to whether it was truly the federal government's place to be funding larger-scale transportation projects. Strict constructionists felt that Congress did not have the power to fund internal improvements, and the issue was debated during the early nineteenth century.

President Madison felt that improving the nation's transportation systems was a noble cause for the federal government, particularly after witnessing the chaos caused by poor transportation during the war, especially in response to the British blockade. However, before any efforts were made towards internal improvements, Madison insisted that an amendment must be added to the Constitution to ensure that there was no confusion over the federal government's role in the situation. Congress didn't really listen to that part of his statement though, and Senator John C. Calhoun promptly created an internal improvements bill that sought to connect all regions of the nation through a series of roads and canals. Congress passed the bill, but Madison was unwilling to approve of government-funded internal improvements without an amendment, and thus vetoed it. Despite their many successes, the nationalists in Congress had failed to create a system for internal improvements.

Henry Clay's American System

Henry Clay heavily promoted nationalist policy such as the American System.
Henry Clay heavily promoted nationalist policy such as the American System.
At the time, all of the economic issues mentioned above were being considered by a faction of nationalists in Congress. The most prominent of these Congressmen was Henry Clay, who gained national fame by supporting an economic system that was designed to bring the nation together and promote the growth of domestic industry. Clay's promotions of the American System led to many of the economic improvements that occurred during the early decades of the nineteenth century. With support from John C. Calhoun and other influential Congressmen, Clay worked to promote the three major components of his system:

  • A new National Bank to stabilize the banking system and keep the state banks in check
  • A Protective Tariff to assist the growing industry in the Northeast
  • A bill providing for Internal Improvements, federally funded by revenues from the tariff, to connect the nation and ensure equal economic prosperity

It's clear that Clay's plans were extremely influential in the economic legislation of the time. Though not all of his plans succeeded as he would have liked (namely internal improvements), the majority of his suggestions became reality, and the American System helped to define the changing image of a growing American economy.

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