To Our Lady of Perpetual Help, whose picture hung in the homes of tens of thousands of steelworkers in Western Pennsylvania in the 1900s

Vox clamantis in deserto

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The Pantheon

The Manufacturing Manifesto is a result of years of research into the Golden periods of American business and capitalism. It has produced a number of iconic biographies. At the seat of Jupiter is President William McKinley, who developed a managed approach to tariffs. On his right side are business innovators such as H. J. Heinz, George Westinghouse, and Michael Owens. On the left there are William McGuffey, America’s educator, and Henry Clay Frick corporate organizer. The Pantheon of books includes tributes to the many developers of early industry (The Pig Iron Aristocracy, Boys of Braddock, and Iconic Lessons of Operations Management). The many industrial laborers are honored in book A Genealogy of Greatness. Over twenty of these “gods of business” are interviewed and questioned about today’s problems in the book-Interviews with the Titans of Business.

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Read the full PantheonOther Books by Quentin R. Skrabec Jr., Ph.D (The Literary Pantheon)

The Boys of Braddock ISBN 0-7884-2516-1

George Westinghouse: Gentle Genius ISBN 978-0-87586-507-2

The Metallurgic Age ISBN 0-7864-2326-9

Michael Owens ISBN 978 1 58980 385 5

In Search of the Lost Grail of Middle Management ISBN 0-7618-2551-7

Glass in Northwest Ohio ISBN 13 978-0-7385-5111-1

Labor Productivity and Profits ISBN 0-7414-3890-9

St. Benedict’s Rule For Business Success ISBN 1-55753-254-0

Iconic Lessons in Operations Management ISBN 0-7414-2893-8

De Metallica Pertia ISBN 0-7414-3559-1

Saintly Lessons and Divine Concepts for Business ISBN 156072845-0

William McKinley: The Apostle of Protectionism ISBN 978-0-87586-577-5

A Genealogy of Greatness ISBN 978-1-934209-46-2

The Pig Iron Aristocracy ISBN 978-0-7884-4515-6

Interviews with the Titans of Business ISBN 0-7414-4536-0

H. J. Heinz: A Biography

William Holmes McGuffey

Henry Clay Frick

Quentinskrabec.comTheironpantheon.comOr Search “skrabec” on Amazon.com

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Prologue

For thirty years I have been researching and writing about the golden years of manufacturing in America, creating a literary pantheon. I have written many industrial biographies and I’ am presently extending that literary Pantheon. This Pantheon includes H. J. Heinz, Henry Clay Frick, George Westinghouse, Charles Schwab, Andrew Carnegie, William McGuffey, Edward Libbey, Michael Owens, William McKinley, Charles Goodyear, and many others. I have researched the nature of the immigrants that filled the factories as well as the capitalists who managed them. I have studied the economics of the 19th century for clues in its creativeness and industrialism. There are themes and factors, which can be recaptured. It is in this history of great industrialists, capitalists, educators, scientists, and inventors that the seed of a future manufacturing renaissance. I grew up in industrial Pittsburgh and managed in the steel industries. I came from a family of steelworkers. No sight intrigued me more than the glowing orange night skies of Pittsburgh that spelled prosperity. I played on the endless slag plies from the Pittsburgh steel mills, and found a love of nature in Frick Park named after one of America’s most committed capitalists. I found a love of learning in the Carnegie libraries and the great Carnegie Museum. Winning a science award from Buhl Planetarium in eight grade, I met a scientific hero in Werner Von Braun. My best Christmas gift was and always will be my Gilbert chemistry set. I lived through the glories and the fall of American industry. I got my undergrad degree in engineering from the University of Michigan, where a learned the automotive industry. While in Michigan I found my favorite piece of American geography in the Henry Ford Museum and Greenfield Village. I have a passion for manufacturing, and ultimately got a PhD in manufacturing management.

My whole life has been spent in the “rust belt” from Detroit to Cleveland to Akron/Canton to Pittsburgh. I saw the “final” glories of these cities. We have been told that free trade policies would be the engine of our economy only to see a factories close. A group of in vogue “Austrian school” or “Chicago” economists have told us for years that free trade is the pillar of capitalism, yet American capitalism saw it glory on the protectionist (managed trade) policies from 1850 to 1910. Sociologists of the same school have told us what is good for the world is good for America. My conservative brothers have left me standing alone on managed trade. The idea that America is exceptional has been debunked, and replaced by the idea that we are merely a state in a big world. Environmentalists tell us that America uses more than its share and our standard of living must be reduced. Manufacturers, like me, lament the passing of American capitalism, American exceptionalism, and domestic production. Our prayers and hopes remain in a return of American capitalism and manufacturing.

American capitalism differs from capitalism in that it is specific. It puts a premium on freedom and the pursuit of happiness. That premium is reflected in fair wages and a higher standard of living. It does not ignore the world, but offers a beacon light for it. It rewards hard work and those that advance society and freedom. It allows for American exceptionalism. It was only in 2000 that I visited a shrine to that type of

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American capitalism. The shrine sits in the heart of the rust belt in Niles, Ohio. It is here that America’s great industrialists honored their fallen President William McKinley. It is a pantheon of bronze busts of forgotten heroes that has inspired my life quest of building a literary pantheon of American capitalism. It is doubtful that any American school child today would recognize these rows of bronze. I believe that America will have a manufacturing renaissance, but the polices since the 1950s have taken on the opposite path. This manifesto offers a different path. It details a renaissance as much as a revolution in manufacturing. It goes belong merely opening old factories, and suggests a new type of manufacturing.

A Manufacturing Manifesto

We are still awaiting the Manufacturing Revolution. The Industrial Revolution was merely one of quantity and methodology. The Manufacturing Revolution will be when the mind of man, not the hand of man does the manufacturing. It will represent the confluence of information systems, computer technology, and robotics. It will be one of man’s greatest ages, far surpassing the “information age.” It will be an evolutionary change more than revolutionary. It will require having infrastructure in place. This confluence is actually under way in places like the old steel slag dumps of Pittsburgh, which I spent my youth. It is on these slag piles of the Industrial Revolution that Carnegie-Mellon tests its robots. This is more than symbolic, the manufacturing revolution will be born in the factories of the industrial revolution, and that process is under way. Whichever country wins this revolution will be the next super-power. It will be a social revolution as well, where robots replace cheap labor or highly productive labor replaces that of cheap hands. The struggles of labor and capitalists will change dramatically. The very role of a manager will change. It will not necessary eliminate jobs, but create a new class of jobs. It will be a world augured in Isaac Asimov’s robotic trilogy. It will bring new challenges with its many blessings, but it will require investment and innovation now. Future success is dependent on creating a vision today. Another often-overlooked part of any manufacturing thrust will be abundant and cheap energy.

The ability to manufacture has been used to define man’s evolutionary progress. Man has been classified not by brain size as much as by the complexity of his manufactured tools. Even the Bible marks man’s advance in terms of manufacture, progressing from Tubalcain, the father of all manufacturers. Early primitive American civilizations are distinguished on the manufacturing prowess to move from the Clovis to Folsom point technology. The Folsom point representing the best of flint pressure-flaking manufacturing, which opened up new horizons in hunting larger game. The Assyrians manufacturing skills created one of the world’s first great civilizations, as did the Egyptians. These were societies built on manufacturing and building, as were their military empires. The Hittites built the first iron-based civilization and ruled most of the

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known of the west with their metal working superiority. The Philistines held Israel captive by not allowing them the knowledge of working metals.

Manufacturing remained the heart of ancient civilizations regardless of political or social organization. As early as 1700 B. C., the Chinese had developed a national industry of trades under the autocratic rule of the emperor. Official state workshops ranged from a few hundred employees to thousands of employees. The Song Dynasty in the seventeenth century B. C. established a national Ministry of Works. The craftsmen lived in government controlled collective workshops in a type of civil monastery. Craftsmen reached the highest level of skill under this specialized organization. Production was often inspected and rewarded personally by the emperor. Quality of manufacture was considered a reflection of the nation’s soul. This type of nationalistic pride in manufacture would augur the early Greeks, Egyptians, 19th century Americans, Nazi Germans, and Japanese of the late 20th century. It was a type of national self-actualization through manufacturing achievements, which a nation becomes the aggregate craftsman. It was the type of manufacturing pride seen in the World Fairs of the 19th and early 20th century. Manufacturing pride can replace that of war in civilizations. The world’s great culture has been a result of man’s ability to manufacture. Agriculture and manufacturing have been the basis of civilizations and great empires. Again it has been the advance of manufacture that allowed for significant advances in agricultural productivity. The Egyptians, Greeks, Romans, Hittites, Persians, Chinese, and other were all expert builders and manufacturers. The lesson of western nations is that the failure to develop and maintain manufacturing has resulted in the fall of great empires. Many may argue that today we are in the Information Age, and that will be the basis of future empires, civilizations, and cultures. The ability to process data, however, has always been limited by the ability to manufacture more miniaturized silicon chips. The chip is the limiting factor not the knowledge of computing. Most philosophers such as David Hume, Adam Smith, and Henry Kames, agree that the way people of a nation earn their living defines the country’s laws, government, and culture. It should be remembered that manufacturing, science, and industry drive information technology, not the other way around. Manufacturing is an economic policy, a social philosophy, and the touchstone of the level of civilization.

Furthermore, there is an inherent love of man’s ability to rise above nature, and to create and manufacture things. We see it in our love of architecture and building, and in the earliest playing of our children with toy blocks. We learn by trying to re-order our world. Our greatest tribute to our God was in our cathedrals and churches. Manufacturing is the touch mark of the human soul. It is even reflected in our great literature such as Robinson Crusoe, which birthed centuries of novels down to this day. The Robinsonade was the technique of the master fiction writer Jules Verne, which hailed man’s ability to survive through primitive manufacture. We never lose interest in watching man create from nothing. Manufacturing is part of man’s psyche. An attribute that was exploited by the early monastic communities of Roman soldiers in Africa.

Medieval Europe moved out of Feudalism and the Dark Ages on the back of manufacturing. No one understood the importance of manufacturing and the nature of man better than the monk St. Benedict, whose followers would build over 40,000 monasteries throughout the world. It is in the monastic business model that we can find many answers for globalization, since globalization has its roots in the monastic

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manufacturing centers of the Middle Ages. Benedict’s vision of human nature became “prayer and work,” putting manufacturing on the level of prayer. Benedict saw self-actualization in man creating with his hands. Monastic manufacturing resulted in a revolution in management, science, and information technology. Their vertical integration offers powerful lessons in supply chain management. No similar historic model offers a successful blend of green and lean. They built green operations that included the world’s first fisheries and forest management. They found energy independence in the wind and water. While their monastic network was worldwide, stringing hundreds of monasteries together, they found favorable local production to limit transportation costs. It was an energy efficient model with many applications for today. Their great libraries and information collection was related to their need to advance manufacturing into new areas.

Christian monastic communities and monks represent some of the world’s oldest factories and trade centers. The Monastic business model includes the age-old monasteries such as the Benedictines, American communal societies such as the Shakers, and German separatists such as the Harmonists. These manufacturing engines were based on similar rules for organizational success, and a belief that man finds self-actualization in his ability to produce. They pioneered industries such as brick, glass, food processing, and iron making. These monasteries revolutionized agricultural techniques, fisheries, and harvesting in Europe. Monasteries evolved rapidly to become self-sufficient and green, and then from that base spread capitalism to deal with their surpluses. For centuries, the monasteries of Europe fed, employed, and trained craftsmen. They employed and taught the commoners in agriculture. In the 15th and 16th century, they revived a broken world economy. They were not only economic engines, but also centers of innovation and knowledge. Beyond manufacturing techniques, they established organizational principles for economic success. Pioneering the science of Human Relations and personnel management. The monks were brilliant at information management, data base creation, and data mining. The medieval monasteries were the original “knowledge creating” organizations, inventing and innovating to advance productivity. Their inventions include the glass kiln, blast furnaces, assembly line techniques, improved bricks, fisheries, crop management, sheep shears, grinding wheels, water power, turbines, deep mining, and textile manufacture. Their organization offers the businessperson insights into building successful and productive organizations.

Probably the most overlooked part of their manufacturing was their green approach. Green was a necessity for these monasteries. Resources were often in short supply, and their agricultural roots had honed them in recycling. Their sanitary systems were state of the art. They advanced intensive farming to maximize the use of land, and developed crop rotation practices. They learned to use all parts of the cattle, sheep, and horses. Reduction of waste, in a resource short world, was the core to their success. Like Toyota, in the 1980s, monasteries realized waste and high inventories clogged manufacturing systems. Energy was a limiting factor and had to be conserved, while searching out new sources. These monks were efficiency engineers that got the most out of their resources, developing wind, solar, and waterpower. They not only conserved resources, but also through technology and productivity drove manufactured products prices down. They balanced green and economic needs, allowing manufacturing to become an extension of man’s natural evolution.

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These monks were true organizational geniuses, combining scientific management with group innovation. They were the first to define organizational mission statements and set corporate goals. They combined and utilized Roman law and military organization to build highly efficient factories. They combined Christian principles to motivate employees. At heart was the concept that manufacture had to be combined with prayer, and through this combination you can achieve self-actualization. They pioneered paternal capitalism that was founded on individual improvement. They build research and development centers that improved all phases of manufacture. They invented the very principles of scientific research. They built great libraries to store scientific and manufacturing data for improvement. Data mining was used to make information work for them in their production techniques. Their organizations are the world’s most successful and oldest. Their principles, techniques, and management approaches are timeless and the organizations they created. More recently, businesses and colleges have turned to these principles for competitive advantage.

What is at the root of this organizational and economic success? The monastic approach honors work on a level with prayer, which centuries later would be honored in America as the “Protestant Work Ethic.” In fact, it was 20th century German sociologist Max Weber that attributed the success of American capitalism to its religious based work ethic. Weber praised manufacture, as did the monks, as Godly. The basis of these great monasteries was their organizational rules, such as the Rule of St. Benedict. These rules reinforced organizational infrastructure, established manufacturing, built a work ethic, and fostered creativity. The rules were based on Roman organizational principles, government, and military procedures. The earliest second century rule of Pachomius had been developed out of necessity to sustain a desert community. Pachomius was an ex-Roman soldier, who knew the importance of organization. The most famous rule was created by Benedict of Nursia (480-547), and spread by Gregory the Great (540-604). Both these men came from old Roman senatorial families, and experienced personally the fall of the Roman Empire. Their personal experience of the entropy and anarchy of the Roman fall inspired a desire for a lasting organizational order. These organizational rules offered the cybernetic guidance needed for stability and growth, and became incorporated in manufacturing management.

It would be the Benedictine Rule that spread order, an inherent praise of manufacture, and economic growth. Like the desert fathers of Pachomius, early sixth century monasteries worked for basic needs. They applied and advanced agricultural science, but self-sufficiency took them into tool making. Monks became skilled blacksmiths to produce plows and carpenters to produce wagons and harnesses. They improved on Roman technology such as the padded horse collar to improve efficiency and productivity. The core of their manufacturing strategy was self-sufficiency or what we would call vertical and horizontal integration. Blacksmithing took them into mining and metallurgy in the seventh century. Blacksmiths produced nails and horseshoes. They expanded into sheep herding to produce woolen clothing, developing iron shears among the way. By the ninth century, success allowed them to more into construction, masonry, and brick making. Charlemagne (771-814) recognized their organizational genius, and their principles were applied to government and education. By the tenth century, these monasteries were the economic engines of Europe. Capitalism was born in the great surplus these monastic organizations produced.

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They moved from self-sufficiency to surplus supply and mass production. The need for productivity improvements led to advances in technology. Energy became critical to expand growth, leading to the full application of waterpower and wind power to power grain mills, forges, winepresses, breweries, glass houses, and iron furnaces. By the eleventh century, the monasteries were the food processing factories of Europe. Clothes manufacture stimulated dye and loom technology. As trading and mass production increased, the monasteries moved into banking to support the economic boom. Increases in productivity allowed for more time to pursue intellectual arts, which also inspired the production of paper and ink. Bringing their pragmatic approach to science, chemistry emerged out of alchemy, physics out of magic, and astronomy out of astrology. The combination of encyclopedic knowledge and manual arts led to the foundation of crafts guilds. Monastic principles instilled quality manufacture into the system, and manufacturing pulls in science and technology advances just like the pull systems of inventory control.

Today’s businessperson may wonder how the study of “religious” rules might apply to the business of business. First it would be a mistake to look at monastic rules as prayer books, they were not. They dealt with the practical problems of mission, organization, management, manufacturing, authority, and corrective action. The Rule of Benedict remains today, the Western World’s oldest living document. It is the only document to fully embrace the pragmatic civil laws, military principles, and organization of the Roman Empire. The rule understood that manufacturing and crafts were in the very soul of man. These rules were guides as to how to run a complex monastery, similar to ISO 9000 in today’s business world. While ISO 9000 makes for a simple analogy, the rules were much more pragmatic, more of a medieval managerial handbook. While standards or rules of today such as ISO 9000 are strategic, monastic rule translates strategy into organizational tactics. The rules did not make saints, but created efficient organizations. No modern standard can boast as Benedict’s Rule, organizations of 1500 years. Benedictine organizations that have outlasted empires, religions, government, natural disasters, and nature’s own entropic drive. Benedictine organizations today exist within every type of political and cultural environment. No simple organizational document has lasted and been used for 1500 years, except that of Benedict’s Rule. This longevity and cultural regeneration is the very heart of the Rule, and manufacturing with prayer was the soul of Rule.

The success of monastic manufacturing and business is not limited to the Middle Ages, but finds a different renewal in the American 1800s. The early 1800s saw the influx of Protestant immigrants, mainly from Germany, committed to communal business communities. These were religious communities of families. The largest such as the Shakers, Mennonites, Harmonists, and Zoarites were well known for their quality products, and a belief that work is at the heart of society. Like their Middle Age predecessors, they lived under strict organizational and religious rules. Most were German Separatists, but many used the secular model of Robert Owen in the 1800s. Owen had studied the success of the Shakers and applied it in a non-religious setting. Owen had created a communal manufacturing center at New Lanark, Scotland in 1800. New Lanark applied a paternalistic type of capitalism. The community provided education, housing, and medical help. The model was highly productive, competitive with the best textile mills of the time. Robert Owen came to America and the Harmonists

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in Pennsylvania and Indiana readily accepted his ideas. The paternal capitalists of the late 1800s, such as H. J. Heinz and George Westinghouse, adopted many of Owen’s ideas. These early American monastic ideas formed the basis of America’s golden manufacturing era.

Countries that do not manufacture are destined to lesser roles. Rome’s final fall saw it completely dependent on other countries for food and products. Few countries have risen to the top tier as merchant nations, exceptions being Venetians and the Dutch, but even these embraced glassmaking and shipbuilding. In the early 1840s, Great Britain fully embraced free trade theories of Adam Smith. In 1851, a backward protectionist country shocked many of the industrial equipment exhibits of the world’s Great Exhibition held in Britain in 1851. Prince Albert was so shocked; he formed a national review to identify the factors in America’s manufacturing success. By the 1860s, British machine makers and tool and die makers were emigrating from Britain to America. By the 1870s, an even more protectionist America was leading in machine and railroad equipment manufacture. Britain remained proud and an apostle of free trade. In the 1890s, protectionist America eclipsed Britain’s iron, steel, machine, glass, ceramic, chemical, and most other industries. Germany’s Bismarck saw the decline of Britain, and moved to build German industry like America, using focused protectionist principles. With Britain’s decline in manufacturing came its decline as the world’s superpower. The point is not to favor protectionism over free trade, but to put manufacturing at the heart of national policy. Free trade is however, the capitalist’s Achilles heel. It offers new markets and draws in the capitalist, but then destroys its very home base.

Manufacturing is the base of any economic philosophy. Bismarck of Germany in 1800s built up industry around his nationalistic socialism. In effect, Bismarck developed a national community for manufacturing. Bismarck moved from national free trade to the type of managed trade that had led to America’s success. Bismarck believed that working people were happier and better off, but he worried about the abuses of capitalism. Bismarck found much success in extending the paternalism of Adolf Krupp to a nation. The danger is that National Socialism can take workers to a form of economic slavery. Andrew Carnegie tied a welfare type of capitalism with paternalism. The ideal operating environment would appear to be some form of paternal capitalism such as that of George Westinghouse and H. J. Heinz. Manufacturing without the hope of someday being a boss or owner is but slavery. Smith believed this type of economic slavery must be avoided. There are social costs associated with bringing in imported cheaper goods, which Adam Smith overlooked. Manufacturing supplies the jobs needed for growth, and makes trade possible. Adam Smith knew nothing of currency fluctuations between nations as we have today. His experience was not manufacturing based but that of trade markets of Glasgow, Scotland.

Even Marxist governments were aware that the real economic power resided in the heavy industries. Communist countries focused on the development of heavy industry because of its pull of dependent demand, its militaristic dimension, and its potential of full employment. Small German and American communal manufacturing communities proved highly successful in the 1800s, with the same type of “communist” control to promote manufacturing. Manufacturing can supply jobs and a standard of living, not possible in trading based societies. China has shown this very power of manufacturing in a mixed political and economic environment. Alexander Hamilton argued that capitalism

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and manufacturing were sisters, but China is example of manufacturing making any model that includes manufacturing an economic success. Still, manufacturing can achieve its greatest potential in a capitalistic model; however, government must always be the auditor and regulator of capitalistic manufacturing. Capitalism inspires man to work, but it can lead to greed, and that is why regulation is part of the American capitalism. The basic concept of capitalism motivates society to produce more. Manufacturing certainly reached its highest success in the American industrial age, where capitalism, American exceptionalism, and democracy ruled.

The rise of America over the great British Empire was manufacturing based. In many ways, Britain had abdicated its world leadership preferring to become the world’s merchant in the 1860s, when it moved to a free trade policy. Britain realized that to be a merchant, it needed manufacturing, and reset it goal to become a banking and financial center. The result was Britain passed as one of the world’s leading manufacturing countries. America seems determined to take the same path. America has now abdicated its leadership to Asia preferring to be the world’s marketplace. Free trade has become our mantra and Adam Smith (1723-1790) our hero. We can look to Europe as our future. Both American political parties are free traders, and since the 1930s Adam Smith has been accepted as economic dogma. Liberals and misguided conservatives have found common ground in free trade policies.1 Tariffs have been effectively blamed for the Great Depression. This logic has created a generation that sees free trade as a given. Yet, few of these followers had read the behemoth Wealth of Nations. Adam Smith was far from a purist as his followers are today. He made exceptions on free trade for industries necessary for a country’s defense or culture. He allowed the British to protect its shipbuilding and France to protect its wine. A “fair trader” today is considered uneducated and ignorant of enlightened economics. A “protectionist” is a dumb nativist lacking education and blindly patriotic. An economist that suggests any benefits of protectionism has the same lunch table as the university creationists. The protectionist and fair trader have even been expelled from their natural home in conservative politics. They are in ideological exile.

Adam Smith’s 900 page manifesto was framed in the Britain of the 1700s. He argued for free trade based on a provincial model. The Union of Scotland and England in 1707 represented the largest free trade zone in Europe, which created an economic boom in Adam Smith’s Glasgow, Scotland. England had successfully moved out of its provincial tolls and tax system. The economic success of free trade was based on British internal free trade versus the clogged internal customs and tolls on main land Europe. Proponents of world free trade today miss the point that the only true analogy to Smith’s view today would be trade between the states of America. Furthermore, does it make sense to put our faith in Adam Smith, who never saw or heard of the Industrial Revolution? Most if not all tariffs of Adam Smith’s lifetime were on agricultural products. A man from a world dominated by craftsmen and small merchants. A man who knew a world of only a handful of manufacturers, and a handful of developed countries. Had Adam Smith seen the economic power and employment of large industry, he would

1 Free Trade is used to identify a government policy. The term is really duty-free in practice. Protectionism is really managed trade as successfully employed in the 1800s. Fair Trade is an acceptable and preferred term for protectionists, but out of vogue as a term. Politicians have beaten back the use of the term fair trade.

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have deemed it as necessary for a nation. Adam Smith was right in seeing all trade as local and capitalism as national. Lacking a one world movement and system, there can be no other view. The real fact is that both free trade and full protectionism are ideas that need open review. Like politics, all trade is local.

American Capitalism and a Vision of a Democratic Manufacturing UtopiaThe father of American manufacturing is none other than Federalist

Alexander Hamilton. It is unfortunate that conservatives have embraced the political ideas of the Federalists, but have totally ignored the economic policies of Federalists. American exceptionalism and sacrifices demands a premium for our labor. Hamilton’s Report on Manufactures should be a guiding document. The following is an important excerpt: “But though it were true, that the immediate and certain effect of regulations controlling the competition of foreign with domestic fabrics was an increase of price, it is universally true, that the contrary is the ultimate effect with every successful manufacture. When a domestic manufacture has attained to perfection, and has engaged in the prosecution of it a competent attend the importation of foreign commodities, it can be afforded, and accordingly seldom or never fails to be sold cheaper, in process of time, than was the foreign article for which it is a substitute. The internal competition, which takes place, soon does away every thing like monopoly, and by degrees reduces the price of the article to the minimum of a reasonable profit on the capital employed. This accords with reason of the thing, and with experience. Whence it follows, that it is in the interest of a community, with a view to eventual and permanent economy, to encourage the growth of manufactures, in a national view, a temporary enhancement of price must always be well compensated by a permanent reduction of it.”2 Hamilton’s thesis would be proven in the1800s. Tariffs built up domestic manufacture and encouraged technology investment that actually lowered prices long run. In addition, domestic competition was strong enough to prevent monopolistic behavior. Hamilton saw capitalism as national in scope. Hamilton’s and Federalist views led directly to the “American System” of Henry Clay.

American capitalism was directly related to the political foundation of Henry Clay’s “American System.” Clay’s American System was a protectionist approach to protect American industries via tariffs, and an aggressive approach to national improvements. The Federalists and the Jeffersonians would split on this to form the Whig Party. To fully grasp the roots of Clay’s economic philosophy, one must first understand Thomas Jefferson’s vision of the nation. Jefferson envisioned an agrarian society of farmers and merchants. In 1790, an estimated 90% of the American population was employed in agriculture. His vision demanded free trade to assure that American crops could move into foreign markets readily. Jefferson had grown up in a tobacco and cotton culture that depended on European purchases and their crops. While he believed in farm self-sufficiency, he feared the industrialization that he had seen in Europe. Hamilton on the other hand saw America’s freedom rooted in its ability to achieve economic freedom through manufacturing and banking. Hamilton, the soldier, was well aware of the role of technology and manufacturing in the ability of a nation to win wars, and believed that manufacturing was fundamental to America’s freedom. Hamilton as a young officer found the colonial army constrained by lack of iron cannon and rifles because of the lack

2 Alexander Hamilton, Report on Manufactures, January 15, 1790

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of American manufacture. America’s moved to cheap dumped British iron after the Revolutionary War, only to be caught again short of manufactured arms for the War of 1812. Interestingly, President William McKinley would have the same experience in his regiment during the Civil War, and it would be President McKinley that was the golden era for pig iron protectionism. Hamilton, however, remained a opposed to across the board duties, like many of his federalist friends, believing that financial systems were the basis for industrialization. Still, at the very root of Hamiltonian Federalism was government’s role to promote industry. Actually, the Federalists were split on tariffs, some seeing no need for them because America lacked manufacturing, and others seeing tariffs as a source of federal revenue. Hamilton envisioned protectionist tariffs to help develop particular industries. Even today we allow a 50 cents a gallon tariff on Brazilian ethanol to promote the domestic development of this industry.

Both Jefferson and Hamilton were constrained by the agricultural nature and lack of manufacturing in America at the time, as well as by earlier colonial British constraints on industries such as iron making. These British prohibitions such as the British Iron Act of 1750 had infuriated Scotch-Irish iron makers like James McKinley (William McKinley’s grandfather) in western Pennsylvania. In particular, the Scotch-Irish moved to the Ohio frontier to avoid tax laws. The Iron Act of 1750 allowed for all raw bars of smelted iron known as pig iron to be shipped to England duty-free, but outlawed the production of iron products, such as kettles, skillets, stoves, forged iron for guns, and steel for the blacksmith shop. These frontiersmen remembered and vowed never to be economically restrained again by any government. Many of these same Scotch-Irish would flee western Pennsylvania to Ohio, Kentucky, and Tennessee to avoid the federal tax on whiskey manufacture in 1794, and would become part of the political base of frontier politician Henry Clay. It would be a base that often disagreed with Clay wanting cheap imported goods, but believed in America.

The rural nature of early America colors the approach of the Federalists papers. But make no mistake about it; if the Federalists were to see the erosion of the manufacturing base today they would be appalled. The Federalists believed firmly in the function of government to regulate commerce. The Federalists were supporters of tariffs to protect American agriculture, but foresaw a day when a different movement would be necessary to promote manufacturing.3 James Madison also argued the regulation of foreign commerce was a function of the federal government.4 They would quickly see through the idea of “free” trade, and realize the nature of the economic warfare we find ourselves. They would well remember their dependence on England for iron when the War of 1812 began. That lesson would help form the Whig party that saw manufacturing as fundamental to national security. The Whig Party saw strong manufacturing as part of national defense, and even Adam Smith saw national defense trumping free trade concepts. The anti-government Scotch-Irish, who a rebelled against federal taxes, believed that the federal government should promote manufacturing as a national defense issue. These freedom-loving patriots realized that economic freedom was necessary for political freedom. They have suffered centuries both in Europe and America from British control of their manufacturing. Similarly, the American declaration of economic freedom preceded the Declaration of Independence by two years.

3 Federalist Papers, James Madison No. 414 Federalist Papers, James Madison No. 42

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The Whiskey Rebellion of 1794 more than anything caused a political divide in the Scotch-Irish along economic lines. The wealthy Scotch-Irish industrialists and the Presbyterian Church leaders had supported the Federalist application of the law. Their poorer cousins in the Pennsylvanian hills opposed a strong central government and taxes on their whiskey. The whiskey tax forced these frontier Scotch-Irish into Jefferson’s “Republican” Party, and the 1820s, “the clapboard junto” of Pittsburgh (those who lived in clapboard houses) put together a strong opposition to the Federalist manufacturers. The Jacksonain Democratic Party (known as the clapboard democracy) controlled the area, but Pittsburgh’s congressmen were protectionists, who sided with Henry Clay in Congress. Clay’s Federalism and strong support of manufacturing turned western Pennsylvania, eastern and southern Ohio, Northern Kentucky, and Maryland into a stronghold for “Clay Federalists.” Clay’s system built a manufacturing base in the Midwestern and New England states. Pennsylvanian Henry Baldwin supported Henry Clay’s American System with an iron fist. Pennsylvania Senator Judge Wilkins became known as the “iron knight” in his support of iron tariffs. The manufacturers ultimately wrestled the vote away from the democrats as Andrew Jackson’s policies turned anti-manufacturing. These manufacturers often held dinners for national protectionists, such as Mathew Carey and Henry Clay. Near-by manufacturing cities such as Steubenville, Ohio and Wheeling, Virginia developed a manufacturing network through Clay and Carey. Matthew Carey would become a proponent of managed trade and an advisor to a young Abraham Lincoln. Clay and Carey (and Hamilton) would be heroes to future Presidents Lincoln and McKinley.

If President William McKinley’s economic roots can be traced to Henry Clay then Clay’s roots can be traced to Federalist and first Secretary of the Treasury, Alexander Hamilton. And like McKinley, Hamilton learned his economics as an army supply officer. Hamilton, while on Washington’s staff, had struggled to get their soldiers clothing because of America’s dependence on British goods. He also learned the hard lesson of inflated dollars as merchants rejected government notes. His experiences would be the foundation for Hamilton’s classic in 1791, the Report on Manufactures, which “prophesied much of post-Civil War America.”5 It would augur both Henry Clay and McKinley’s approach to government as it related to national industrial planning, and the importance of protecting such industries as pig iron. Hamilton was the first to suggest a scientific approach to tariffs versus across the board revenue tariffs. First defense and national industries were to be protected, followed by targeted infant industries. He argued for lower tariffs on raw materials to help industry. This is why you must manage trade for the good of the country. These early founders invested federal money in the development of canals and roads to expand manufacturing. Hamilton would win many disciples including Henry Clay.

Henry Clay was a Virginian lawyer who moved to Kentucky to launch a career. In 1810, he was elected to the United States Congress. Clay was a nationalist, patriot, republican, Founder of the Whig party, and a Federalist. In his junior years in the Senate, he advocated a strong national bank and a national road system. Often Clay favored the good of the nation over his own constituents in Kentucky. His oratory, compromising skills, and patriotism brought him quickly to the position of Speaker of the House. Clay not only fashioned the position of House Speaker, but he formed the powerful standing

5 Ron Chernow, Alexander Hamilton, (New York: Penguin Books, 2005), 374

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committees such as the Ways and Means Committee, which would be the pedestal to launch the career of William McKinley years later. Clay also created a Committee on Manufactures to help stimulate American manufacturing as Alexander Hamilton had suggested years earlier. Clay appointed members for these powerful committees, and thus centralized legislative power under the position of Speaker. Clay used the power to create a national infrastructure for an industrial America. Clay’s vision of an industrial empire took him from Jeffersonian Republicanism to Federalism and then to conservatism and republicanism. Some Federalists, however, were New England based free traders. Clay’s arguments and the rise of American manufacturing won over many Federalists who believed in the destiny of the American republic as a world power. Clay had grown up in the economic debates between the Jeffersonians and the Federalists.

Amazingly, the early Jeffersonians promoted duty-free trade were possible to assure tobacco and cotton plantations could trade with England. British dumping of defense related materials such as iron, saltpeter (for gunpowder), foundry products, hemp, and an array of manufactured goods. America had become dependent on Britain, and might have faced a major defeat in the War of 1812, when providence intervened a in the years preceding the war. Political disagreements with England required some strong action. Jefferson imposed an embargo (the ultimate tariff) on some British goods and later there was a British embargo. The lack of iron, in particular, caused the start-up of America’s iron furnaces that had been dormant for decades. Saltpeter and gunpowder mills were re-started. American manufacturing was created as foundries and forges opened again. A mini economic boom resulted. The result was an industry, while still weak, could supply the American fight. America would win the war, but Brittan would later turn to economic warfare to break the young American nation.

The struggle and the delineation of these competing visions of agriculture and industry would evolve as the nation evolved. By the dawn of the 1800s, the nation had a developing manufacturing sector in New England. America was learning to produce guns, gunpowder, farming implements, and textiles. Even Jefferson marveled at the industrial growth and its contribution to the nation. Yankees had smuggled in new automated looms from England and American textile manufacture moved to a new level. The acceptance of automation had given American textile manufacturers an advantage over the labor-intensive British industry. Its own anti-automation proponents known as Luddites had held England back. Furthermore, the War of 1812 had caused a surge in American textile production as part of the need for economic freedom, as well as, a boom in iron manufacture in the middle states. The McKinley family would ultimately purchase one of those infant iron furnaces of 1812 in Niles, Ohio in the 1850s.

The War of 1812 and the economic warfare that followed extended into the 1820s, and proved Hamilton’s view of the need for economic independence. The British attempted to destroy the American textile industry by dumping huge quantities of British textiles on American docks. The British similarly dumped cheap pig iron to suppress the American pig iron industry. Henry Brougham in Parliament declared, “It was well worth while to incur a loss upon the first exportation, in order, by the glut, to stifle in the cradle, those rising manufactures in the United States.” The British were more successful in this type of war bankrupting hundreds of American manufacturers and closing charcoal iron furnaces throughout the country. Lord Brougham in Parliament of 1816 summarized the strategy: “ It is well worth while to incur a loss upon first exportation, in order by the glut

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to stifle in their cradle those rising manufacturers in the United States which the war has forced into existence contrary to the natural course of things.” The northeast put political pressure on Congress to save its textile-manufacturing base, and the Pennsylvanian, Virginian, and Ohio pig iron producers and users joined the political pressure. That pressure would build and lead to the formation of the “American System” of Henry Clay.

Congress hesitated to act, torn by competing regional goals. The southern cotton growers opposed any tariffs on British goods, believing Britain would retaliate with tariffs on cotton and tobacco. The major portion of the South’s cotton and tobacco went to Great Britain for processing. Furthermore, even the northeast representatives were torn between the textile manufacturers and the merchants, who favored free trade. The struggle in congress in 1816 would produce a new champion in Henry Clay, Speaker of the House. The congress appeared hopelessly deadlocked on the issue. Clay built an alliance for the tariffs based on nationalism versus regional politics. The debate took place in a temporary brick building (at the site of today’s Supreme Court), known as the “Old Brick capitol. The city of Washington lay in ruins after the sacking by the British, and offered a stark reminder to Congress of the need for a strong defense. Clay found allies in southerners John Calhoun and President Madison, who would help tip the balance. Clay brought in the middle state representatives who had suffered from British dumping of iron products to suppress American industry. He astutely played on rising nationalism and anti-British sentiments to bring in enough southern votes to pass the tariff. The embryonic Pig Iron Aristocracy rallied behind Henry Clay. The result was America’s first tariff- the Tariff of 1816, which established duties of 25% on cotton and wool products and 30% on iron products. The Tariff of 1816 would help the financial security of the Pennsylvanian ironworker families, such as that of the future William McKinley.

Clay had by the Tariff of 1816, not only broken from Jefferson’s thinking, but that of his own Federalist leanings of free trade. The Federalists were split because tariffs appeared to be a heresy. Many Federalists were free-trader Yankees, even thro they favored helping national industries. The split would eventually lead to the Whig Party. Clay forged a new path for American capitalism that was nationalistic and economic. It was a Magna Charta of American economic freedom. Clay realized that economic war was a reality in the world of the 1800s. Clay’s vision was similar to Jefferson’s, differing only in that industry was substituted for agriculture. Like Eisenhower in the 1950s, Clay envisioned a system of national transportation to support industrial growth. Clay molded a powerful new philosophy, which blended Jeffersonian independence with economic manifest destiny. Clay went further to justify his American System by blending in American moral superiority with nationalistic capitalism. The momentum had turned in Clay’s favor by 1824. The struggle, however, would not end as skillful opponents arose such as Daniel Webster.

Congress in 1824 moved to debate even more extensive tariffs. Clay, the orator, would emerge as leader of this industrial movement. He thundered in Congress with an oratory reminiscent of Patrick Henry a generation earlier:

Is there no remedy within the reach of the government? Are we doomed to behold our industry languish and decay yet more and more? But there is a remedy, and the remedy consists in modifying our foreign policy, and adopting a

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genuine American System. We must naturalize the arts in our country, and we must naturalize them by the only means, which the wisdom of nations has yet discovered to be effectual- by adequate protection against the otherwise overwhelming influence of foreigners. This can only be accomplished by the establishment of a tariff.6

Clay struggled against his oratorical match, Daniel Webster, and the entire southern wing of the House of Representatives. Clay had strong support of the Pig Iron Aristocracy’s Henry Baldwin, the “iron knight,” from Pittsburgh. Daniel Webster of New Hampshire opposed the tariff because it might hurt the New England shipping industry. Clay persisted, and on April 16, 1824, the Tariff of 1824 passed 107 to 102. Since cotton and tobacco caused resistance in South, a break down of the slave versus non-slave states is more telling. Non-Slave States voted for the tariff 89; against 32. Slave states: for tariff 18; against tariff 70. Ohio supported the tariff not only in the Mahoning Valley but also in more western counties where an infant wool industry was emerging. Pennsylvania and Ohio’s Pig Iron Aristocrats added additional support. President Monroe signed it in May. The Tariff of 1824 extended the general level of protection to 35% ad valorem (the percentage of value as represented by the invoice). The Tariff included cotton, wool, and iron products also extended it to the hemp producers of Clay’s Kentucky.

Clay’s politics started a change in what would become the future core of the Whig Party (known as Iron Whigs) and President McKinley's base- the Mahoning Valley, Niles, Youngstown, Canton, Pittsburgh, western Virginia, and Ohio’s Western Reserve. These old frontier areas had a large Scotch-Irish population who had opposed with guns, the whiskey taxes of the Federalists. They tended to be frontier Jeffersonian, but the protection on wool and iron by Clay started to build base for a new type of Federalist. Industrialization was changing the area as well, and most middle-state Federalists were moving toward protectionism versus their initial free trade policy. National roads and canals favored the growth of these areas, which was fundamental to Federalist theory. This Ohio old frontier was also similar to Clay’s Kentucky congressional district.

The victory of the 1824 tariff bill split the nation as well and cost Henry Clay the presidency in 1824, but the defeat led to the formation of the pro-industry Whig Party. Clay would further develop his American System as Secretary of State for the new president John Q. Adams, but political opposition in the south was growing too. The opposition was gathering behind Andrew Jackson and the Democrats. While the Pig Iron Aristocracy supported Adams and Clay, Jackson’s popularity triumphed over local interests on the Allegheny plateau of Pennsylvania and Ohio. In fairness at the time Northern state congressmen whether Jacksonians, Jeffersonian, or Federalist supported tariffs. The rural Scotch-Irish were fierce Jacksonians as a results of Federalists efforts to tax whiskey, but the Scotch-Irish were pro-tariff. The Jacksonians were positioning for a presidential run, and found success early by taking control of the Twentieth Congress in 1827. The Jacksonians of the Democratic Party had strength in the west and south. The result of the popularity of tariffs in the east and middle states and political division led to the “Tariff of Abominations” as tariffs became a party and political issue. The Democrats actually allowed an unbalanced tariff to be passed by the National Republicans, turning

6 Robert Remini, Henry Clay: Statesman of the Union, (New York: W. W. Norton & Co., 1991), 230

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the measure into future votes for the Democrats and ultimately lower tariffs. The bill extended the tariff on certain products from Ohio, Pennsylvania, Kentucky, and New York by increasing the duties on iron, spirits, hemp, and molasses. The wool products of New England, which Clay had initially used to justify the earlier tariffs, were basically ignored with a modest increase. Clay could only watch as the bill passed, assuring future Jackson votes in the powerful northeast. President Adams signed it because its usefulness outweighed future political problems. The Tariff of Abominations would in retrospect give Jackson and the free trading Democrats the White House, setback the nationalistic tariff policy of Clay, and move the nation towards civil war. The Jacksonain movement re-strengthened the Democrats on the Ohio frontier because of the personal popularity of Andrew Jackson, but ultimately Jackson proved a weak supporter of American manufacturers, which helped bring some Democrats into the Whig Party of Henry Clay.

Jackson’s weak trade policies had started to hurt his popularity. Clay’s industrial vision was growing in 1828, but it lacked a national political base such as Jefferson’s. The success of the American System was still a regional phenomenon, allowing Democratic Andrew Jackson to take the White House in 1828. The Jacksonians efforts to reduce tariffs were somewhat muted in Congress by Clay and his followers. Jackson’s popularity won him re-election over a challenge by Henry Clay. Jackson would be Clay’s nemesis throughout their careers. Clay might well have won the presidency except for the split the Scotch-Irish Jackson caused among the Scotch-Irish. The Tariff of Abominations in 1828 had caused the legislature of South Carolina to pass a Nullification Act. For the sake of the union, Henry Clay compromised with the Jacksonians to pass a slightly reduced tariff. The Jackson administration was a constant problem for protectionists such as Clay, yet the industrialism of the north and east represented a growing political base. The Jacksonians would bring down the National Bank system, but tariffs remained with only minor reductions.

The national banking system known as the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836). The national bank had been a key factor in the industrialization of America. The bank had been a Hamiltonian approach to assure money and credit were available to industry. Clay held the tariffs, but lost the battle for the national bank. Still, the national bank served a very important role in jump-starting American industry. The bank further showed that credit and money help was part of the government’s role. Some might argue that a national bank might have a role today.

The counter-revolution of Clay and Webster resulted in an alliance between labor and capital under protectionism, which would be embodied in the formation of the Whig party and later the Republican Party. Clay believed the laborer to be part of American capitalism. This fundamental premise of an alliance of labor and capital, and the strength of that alliance would define the success of the new Whig party as well as the Republican Party for the next 60 years. To counter the folk hero of Andrew Jackson, the Whigs elected their own Scotch-Irish hero, Davy Crockett of Tennessee to Congress. The Whigs would also attract future leaders such as Abe Lincoln, James Garfield, and Scotch-Irish William McKinley in the 1850s.

To focus solely on the political ramifications of Clay’s American System, however, would also be to overlook the realization of Clay’s (and ultimately McKinley’s) dream of an Industrial Eden. And it truly was a system where tariffs were focused to help

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infant industries, and the tariffs revenues were used to build roads and canals. In the northeast, textile mills were growing; in Pennsylvania and Ohio iron furnaces were being built; and the American nation was moving from an underdeveloped country to an industrialized one in the first decade of the 1800s. The American system of industrialization was being held by industrial critics such as Charles Dickens as utopian. The manufacturing methods and automation of American industry was rapidly becoming the standard of efficiency for the world. Pioneering American industrialists such as Francis Cabot Lowell started to develop uniquely American textile factories. While still physically demanding, the factories were clean and offered schooling and training. Even old Jeffersonians were proud of the rise of American manufacturing supremacy.

Part of the superiority could be found in the American “factory system.” The tariffs and government contracts produced volume levels never previously encountered, allowing a shift in many industries from a crafts system to the factory system. In 1812, Thomas Jefferson had contracted Eli Whitney to produce arms with interchangeable parts; it was the first government contract. The Springfield Armory under Colonel Roswell Lee advanced the factory system in the 1820s with the application of labor specialization and automation. The real progress was not so much in the ability to produce standardized and large quantities of weapons, but the growth of the new industry of machine making to support such industries. The Tariff of 1824 had built a foundation for American investment by stabilizing the market for American industrial goods. In the 1830s, America was becoming a nation of mechanics as exemplified by the appearance of mechanics’ institutes, schools, magazines, and newspapers. The Franklin Institute of Philadelphia was founded in 1824 to promote the advance of mechanics and science.

The protective tariffs caused an industrial boom in New England’s textile industry. The textile manufacturers were well protected and the textile industry grew, and it birthed the machine industry to support the automation of the textile indsutry. Utilizing the waterpower of the Connecticut River, the machinery industry grew to support textile manufacture, arms manufacture, and farming equipment. The growth caused England’s greatest machinists to immigrate to New England. They came with British machines, which the New England Yankees reverse engineered into better machines. At the 1851 Crystal Palace Exhibition, the British were shocked and humbled by the American machine technology. The Connecticut Valley would become a bastion of tariff support for Clay and then McKinley. The machine industry opposed the Jacksonians and would ultimately find a home in the Whig Party and Republican Party. The textile industry and ancillary industries had demonstrated that tariffs could create focused growth.

The tariff created volume and stabilization in the textile industry ushered in an era of invention and technology after 1812. An 1837 survey by the state legislature of Pennsylvania of the textile industry reported the amazing advance:

Ten years ago, it was generally supposed, that few improvements in machinery could take place. The machinery of that day is now useless; and another period of ten years may make the same difference; manufacturers are subject, in this particular, to a heavy tax. He who advances with the times, must incur the cost of continual improvement; he who lags behind, must lose in the cost of his production. The success of the American textile industry was a manufacturing

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miracle attracting the world’s manufacturers, writers, and politicians.7

Henry Clay toured the textile industry several times in the 1830s to furthermore promote his “American System.” One of the mills was named after Henry Clay to honor his protective tariffs. Even Clay’s enemy Andrew Jackson honored the textile industry with a personal tour. Clay was now able to address the hero of free trade and the Democrats’ philosophical heart-Adam Smith. Adam Smith’s 1776 book Wealth of Nations had become the banner for free trade. Henry Clay now argued that free trade could reduce prices in the short run but at the expense of capital investment, invention, and automation. Furthermore, Clay saw capitalism as a national philosophy, not an attribute of free trade. Still, the farming majority saw it much differently, fearing international reprisals and higher prices for domestic goods.

Henry Clay would bring philosophical support for protectionism. Henry Clay, the lawyer, had actually read Smith’s long and boring narrative. Clay understood the weakness of Scottish Smith’s ideal of free trade. Smith had allowed for a number of exceptions in his free trade proposals such as defense industries. By doing so, Smith allowed exceptions for some of Britain’s strongest industries. Clay saw industry itself as basic to America’s defense of its freedom. Clay believed in capitalism at the national level, but felt political factors restricted the type of international capitalism suggested by Adam Smith. Furthermore, Clay was a true conservative, seeing America as having supremacy and a God directed destiny. The survival of democracy depended on the productivity of its laborers. To Clay protectionism was critical to freedom and democracy itself. He further argued that Smith based his thesis on the trade-based economy of Scotland, where trade was their industry. Clay’s friend and amateur economist John Q. Adams agreed completely. Both of these men would champion the “American System” as a political alternative. Clay’s philosophical base for protectionism helped win over some old Federalists as well as many Jeffersonians.

America’s Machine AgeThe period from 1840 to the Civil War was one of slow growth for the American

industry. Whig political pressure kept the tariffs favorable, and abundant resources allowed growth. The iron industry, in particular, grew and improved. The Connecticut Valley saw an emergence in the machine tool industry. The Connecticut Valley had a long history of manufacturing. Like all immigrants, the Puritans moved west to find prosperity. One of the earliest of these movements was to the Connecticut River Valley in 1636. The Connecticut River starts in the mountains of New Hampshire and cuts through Vermont, Massachusetts, and Connecticut into Long Island Sound. In the early 1600s some Pilgrims and Dutch had a fur trading operation, but not farming. It was an extremely fertile valley, which drew immigrants from New York and Pennsylvania. More importantly, the Connecticut River was a huge energy source. The Connecticut River’s fall over its length is estimated to have had an energy potential greater than that of Niagara Falls. The river could support power for gristmills and iron furnaces, making farming more economically successful. The power of the Connecticut River caused a mixing of nationalities, and the emergence of American manufacturing. The Valley would birth manufacturers, such as Eli Whitney, Samuel Colt, Francis Lowell, Cyrus

7 Anthony Wallace, Rockdale, (Lincoln: University of Nebraska Press, 1972), 186

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Buckland, Thomas Blanchard, Alexander Holly, and George Westinghouse. The ethnic mixing retained the Protestant work ethic and economic drive of the Puritans. The Connecticut Valley would launch the Machine Age in America.

The Puritans in Connecticut expanded their crafts and skills. Twenty-six towns recorded silversmiths before 1776. Silver plate was one means of storing wealth in a pragmatic manner, so favored by the Puritans. The demand for silver product created world-class silver smiths in New England such as Paul Revere of Boston. The Puritans of Connecticut really started the metals trades of America. Even with limited efforts to produce pig iron, the Connecticut colonists developed a secondary metals industry unequaled in the other colonies. Connecticut developed eight rolling mills (two more than the total of all the other colonies), which manufactured hoops for barrels, nails, and sheet for tinplate. The demand for iron bar created a search for bog iron, which was found in 1734 in Salisbury Township near the New York border. Initially, these industrious colonists used crude Catalan furnaces and small forges. By 1740, charcoal furnaces were being built; some of these became “iron plantations”, making an array of products. Connecticut ironsmith advanced the technique of steel making for small tools, knives, and banquets. The area became known as the “Arsenal of the Revolution.” In 1762, Ethan Allen, future Revolutionary War hero, built his Lakeville Furnace. He added some of the large forges in America to make cannons and anchors. Without the Salisbury iron works, it is doubtful that the colonists could have armed properly for the British.

The great tradition of the Connecticut Valley was again awoke under Whig polices in the 1840s and 1850s. Cheap energy, Whig tariffs, and regional capitalism again birthed new industries. The machine tool industry took root. Lathes were refined and applied to new applications. These “valley guys” invested in research and development. They made precision machining a “Holy Grail.” Their fame grew within the field as machinists emigrated from England to the valley. They stole technology when necessary and improved on it. At the famous Great Exhibition of 1851 in London, America shocked the world with its machines and tools. America was now a manufacturing power on equal with England. Prince Albert was so shocked he formed a committee to detail how America had surged ahead of industrial Britain. The list is informative for today’s managers.

(1). A logic to exploit abundance(2). High literacy rate(3). Few barriers to organizing business(4). Lack of resistance of the American worker to innovation(5). A highly competitive nature

Interestingly, today these can be considered our weaknesses.Lincoln exploited these strengths during the Civil War, and Lincoln forced

domestic production were possible. He stirred a competitive spirit in Union manufacturers to build bigger and better arms. Great pride would be found in the stories of casting the world’s largest cannons at Pittsburgh’s foundries. The American spirit impressed the imagination of French science fiction writer Jules Verne, whose stories hailed American ingenuity. It was competitive spirit that wanted to produce the biggest of anything. Americans took pride in producing cannon bigger than those of those of the Krupp in Germany. To make things bigger required the development of technology. The success led to the Republican application of tariffs throughout the end of the 1800s.

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American competition led to a love to conquer not in war but in the technology of the World Fairs. To Europe it seemed boastful and wasteful. By the Philadelphia Exposition of 1876, America was the world’s technological leader. American heroes were capitalists, inventors, manufacturers, and engineers. Machines were the art of America, and engineers were its artists. America was fulfilling the predictions of technological greatness predicted by Jules Verne. America led the world in engineers, while today we rate at the bottom of industrialized nations.

Another part of America’s success was the competitive and fundamental approach of American education. Much has been written about William McGuffey and capitalism because of Henry Ford’s love affair with McGuffey Readers. It must not be lost in any discussion that McGuffey was an educator, not a philosopher. McGuffey Readers hailed American exceptionalism. Maybe more revealing was the description of the education of Henry Clay Frick, the father of American capitalism. Frick biographer George Harvey described it as: “The curriculum comprised the familiar three R’s, slightly amplified, the books allotted being McGuffey’s Reader, Pinneo’s grammar, Mitchell’s geography and Ray’s arithmetic.” Other McGuffey capitalist alumni include John Rockefeller, Andrew Carnegie, Charles Schwab, Charles Goodyear, Thomas Edison, Andrew Mellon, George Westinghouse, H. J. Heinz, and many others. McGuffey did not mold roots of American society but often merely spoke for them. More so than Max Weber’s “Protestant Work Ethic,” McGuffey’s rationalization for class structure and elevation of industry to a virtue formed the basis of American capitalism. McGuffey took on Marxism before Marx had defined it as a political system. The fundamental support of capitalism came from McGuffey’s unwavering support for individual property rights. Likewise, his basic support of capitalistic concepts came before Capitalism was defined as an economic approach. He saw the existence of poverty and wealth as both in God’s providence. Neither was intrinsically evil. McGuffey personally feared Andrew Jackson in his day as promoting redistribution of wealth. Poverty was to be addressed by the wealthy, not solved by political schemes to redistribute wealth. McGuffey preached competition when socialism preached political equality. Lastly, McGuffey believed Americans were special and destined to do great things. It is exactly the educational system that is lacking today. It was the opposite of today’s world view.

The Golden Years of ProtectionismThe Tariff Bill of 1890 was the career signature of William McKinley, and it

would give him national support and a local defeat. What at first was called his Waterloo would actually forge the sword of victory. The Fifty-first Congress of 1888 formed with what was believed to be a mandate for tariff reform. The Republicans controlled the White House and both branches of the legislature. Providence seems to favor McKinley, and McKinley’s power was peaking. The tariff issue, now preeminent was what McKinley studied his life for. The new president Benjamin Harrison was for high tariffs, although not a personal friend of McKinley, but McKinley drew on old friends such as ex-president Hayes. McKinley’s showed true brilliance in his compromises and teamwork, not only in the House, but also with the Senate and White House. He was dealing with a mix in both parties. The tariff bill included many innovations, which helped American farmers and manufacturers. It was an extremely well prepared by on

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industry and product statistics. The bill completed the evolutionary steps of American tariffs from revenue generating to protective to industry development. No bill before had been directed at policy to build industries such as tinplate and sugar. Yes, there would be a small increase initially in prices, but prices would actually decrease long term as industry invested in research and development because of stable prices. This was a pleasant surprise that long-term market stability actually improved investment. Think of today as the swings in energy prices discourage long-term investment.

McKinley’s Bill of 1890 was the best researched ever, and used science and statistics to apply the tariff rates. First McKinley argued that the revenue tariff approach was the real problem, not protective tariffs. His statistics were convincing: “Before 1820 nearly all our imports were dutiable; scarcely any were free; while in 1824 the proportion of free imports was less than 6 percent; in 1830, about 7 percent…. The percent of free imports from 1873 to 1883 was about 30 percent, and under the tariff revision of 1883 it averaged 33 percent.”8 For his 1890 bill it would be 50%. The difference was that it focused on the nation’s needs, not revenue producing, which for years had been the only major source of government income. The plan was fully consistent with the Federalists view of a manufacturing utopia. The McKinley plan was a result of years of study, and none knew more about tariffs than McKinley, but he would have to make political compromises to get it passed. McKinley poured nightly over the tariff schedules, and surveyed his colleagues on industry needs.

McKinley argued that protective tariffs had not restricted exports, and again the numbers supported him: “We sell to Europe $449,000,000 worth of products and buy $208,000,000 worth. We sell to North America to the value of $9,645,000 and buy $5,182,000. We sell South America $13,810,000 and buy $9,088,000.” McKinley was not alone is his evaluation. Bismarck in 1882 had hailed the protective tariffs of America: “ Because it is my deliberate judgment that the prosperity of America is mainly due to its system of protective laws.” The McKinley tariffs were focused on building America, not restricting trade. They were applied in a manner that did not produce trade wars. Still, McKinley was clear that his tariffs were nationalistic: “The free-trader wants the world to enjoy with our citizens equal benefits of trade in the United States. The Republican protectionist would give the first chances to our people, and would so levy duties upon the products of other nations as to discriminate in favor of our own.” McKinley extensive study had truly brought scientific management into tariff rates, but Congress prefers politics to science. A tariff commission was also established to monitor the impact of the tariffs. This regulatory committee helped the opposition assure fairness and companies invested in jobs, not filling their pockets.

8 William McKinley, “ The Value of Protection,” The North American Review, June 1890, Volume 150, Issue 403, pages 747-48

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Free TradeAmerica has developed the British idealism of free trade of 20th century Britain. A

path that took an Empire to a small world state. At best, American politicians do not understand the role of manufacturing and the consequences of the lack of manufacturing. At worst, America is willing to trade jobs for ideology. To buy minds for democracy instead of convincing them with success. It is more than just jobs (as though that weren’t enough), it’s about energy. It’s also about American freedom and our way of life. Without manufacturing our destiny is a twentieth century India. The problem cannot be overcome by free trade. One might argue that we are still the military power of the world. True, but for how long. Many of our vital military machine parts are not manufactured here. The very fuel for these military vehicles is mainly from other countries. America’s downfall will not come from a nuclear warhead or a successful military invasion, but in its inability to defend itself. We are already in a position where small countries can generate crippling economic blows to our nation. Free trade assumes a one-nation world, not seen since the times of Babel. It assumes one world mission and equality. It assumes national self-sacrifice for the greater world, which is a myth. The type of free trade we have today is world socialism with the goal of redistributing the wealth of nations (not redistributing the wealth to the poor of the world). Governments still for the most part act in self-interest, which makes free trade far from fair trade.

To put it in the simplistic village localism of Adam Smith, I’ll relate a true story. The Congress had been under weeks of stress and in fighting. Neither party was willing to cross the aisle. The President watched powerlessly as national unemployment spiraled up, and money to buy houses disappeared. The farm representatives of Iowa and other farm states, and the opposition industrial states had battled to a standoff. One Midwest congressman rose to share his unbiased observations of the industrial belt and forge an alliance:

In passing along the highway one frequently sees large and spacious buildings, with the glass broken out the windows, the shutters hanging in ruinous disorder, without any appearance of activity and enveloped in solitary gloom. Upon inquiry what they are, you are almost always informed that they were some cotton or other factory, which their proprietors could no longer keep in motion against overwhelming pressure of foreign competition.9

This was not spoken today but in 1820 by Henry Clay! America was in its first depression after its first great industrial expansion. She was still celebrating her second victory over the world’s greatest military in the War of 1812. America had opened her ports to all goods duty free, and an aggressive British empire saw the opportunity to win the economic war. The crisis would result in the “American System” and lead to her becoming the world’s manufacturing center forty years later. This worldwide crisis consisted not only of economic factors but a fuel shortage in Britain.

In the 1860s, Britain fully embraced the theories of free trade, and within three decades lost it manufacturing lead with the rapid decline of iron, steel, coal, and machinery industries. At about the same time, America implemented managed trade with

9 Thomas Cochran and William Miller, The Age of Enterprise, (New York: Harper & Row, 1942), 12

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protection to specific high employment and infant industries, and it was America that replaced Britain in industrial leadership. The protectionist tariffs of America from 1860 were really “golden” tariffs leading to America’s greatest industrial period ever. Prices actually went down as industry stability created long term investment in technology. The better term here is managed trade policies, which were protectionist, but avoided trade wars, and demanded economic reciprocity (not political). During the great Republican tariffs, America investments revolutionized glass, steel, communications, and oil industries. Against the common wisdom that big business would pocket the profits from tariffs, business saw stability of protection as an incentive for long-term capital investment. Wages increased during the period as well as Americans were protected against cheap labor. Vertical integration mushroomed as protected raw material prices forced industries to look for American raw materials. America was fully employed and shipping its manufacturing surplus overseas. Protected industries actually reduced manufacturing costs and were competitive with the world. With tariffs as the government’s major income (there were no income taxes) there was a surplus, and the main problem was how to spend it! This golden period (1890 to 1907) has been overshadowed by the later corruption and progressive shadow of Teddy Roosevelt.

Statistics for the 1890 to 1900 decade support the conclusion that prices came down, profits rose, capital investment went up, and wages held or slightly increased (real wages clearly rose). Average annual manufacturing income went from $425 a year and $1.44 a day in 1890 to $432 a year and $1.50 a day in 1900. The average day in manufacturing remained around 10 hours a day. Heavily protected industries such as steel fared slightly better with wages. The cost of living index fell during the decade from 91 to 84 or about 8%. The clothing cost of living dropped even more from 134 to 108 or 19%. Food stayed about the same but the cost of protected sugar dropped around 25%. The bottom line is that real wage (adjusted for cost of living) index rose from $1.58 a day to $1.77 a day in 1900 or about a 12% increase.10 The success of this period of managed trade depended on government oversight, business cooperation, and labor support. Maybe just as important in a belief in American exceptionalism and healthy nationalism.

It’s not a small point that managed trade can be abused as capitalism itself. The McKinley success depended on American capitalists re-investing in American plants. Early on in the 1882, Congressman and Chair of Ways and Means, William McKinley formed an overview board in congress to accesses the ongoing impact of the tariffs. This overseeing and regulation was the final piece of the puzzle, preventing the abuses many feared. Managed trade, however, contradicted Adam Smith. University economists and politicians lined up to attack the success of McKinley’s tariffs.

Wealth of Nations

The least read, most often quoted book remains Adam Smith’s Wealth of Nations. It is rarely misquoted, in that few who quote it have had to punish themselves by reading it. The 1776 world reflected in Wealth of Nations has remained a model for today’s

10 Albert Rees, Real Wages in Manufacturing 1890-1914, (Princeton: Princeton University Press, 1961)

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world. It is used to justify the call of free trade. In 1776 the British world was yet to enter the industrial revolution. The world was dependent on the trade of agricultural products. Spices, tobacco, and precious metals were the major oceanic trade. Britain’s small manufacturing base had no competition. Adam Smith was a true genius in understanding the aggregate operation of world economics in a pre-industrial world. Adam Smith clearly defined the assumptions and restrictions of free trade in that 1776 world. In many cases, in unusual ways, he even foresaw the problems in a modern world. Adam Smith foresaw how factors could act as a restraint to free trade. The problem is not so much in the application of Adam Smith’s principles, but in the correct application of Adam Smith’s principles.

Adam Smith’s free trade exceptions are often overlooked. First was the exclusion for defense, which is a large hole in itself. Second is a lesser discussed exception: “The second case, in which it will generally be advantageous in lay some burden upon foreign for the encouragement of domestic industry, is, when some tax is imposed at home upon the produce of the latter. In this case it seems reasonable that an equal tax should be imposed upon the like produce of the former.”11 This is the essence of the fair trade argument.

American products, in fact, carry a high social tax. That tax includes pensions, health care, safety requirements, and standard of living. Adam Smith would agree that these are monetary charges on our products. Tariffs should be set to reflect the home social tax we impose on our products. This is at the heart of why world trade is not free or fair. Chinese product competes unburdened by the costs of pensions, health care, safety, and standard of living, let alone the high cost of freedom paid by generations of Americans. The cost of this American social tax is as high as 30%. Certainly our steel, automotive, refining, and most manufacturing would meet both of Smith’s exclusions. Adam Smith even went further: “As there are two cases [defense and internal tax] in which it will generally be advantageous to lay some burden upon foreign, for the encouragement of domestic industry; so there are two others in which it may sometimes be a matter of deliberation.”12 The first of these cases was economic tariffs in cases like dumping. The second would be the case of slow implementation of free trade. Adam Smith realized that unemployment could be a major issue. Smith noted in this case: “Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection.” These are the “lost” chapters of Adam Smith.

McKinley, Managed trade, and Reciprocity

McKinley’s model is the best for democracies and capitalism. McKinley’s “dinner pail industrialism” is clearly on a par with Jefferson’s agrarian vision, Clay’s American System, and Roosevelt’s New deal. In all these cases, at least for the period, they gave proven results. Protectionism and tariffs has become an anti-intellectual position in a complex world. McKinley saw protectionism or managed trade as an extension of the Federalist view of government’s role to expand commerce.

11 Adam Smith, Wealth of Nations, (New York: Prometheus Books, 1991), p. 361, [ chapter of restraints of certain imports]12 Smith, p. 363

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Protectionism was a conservative principle until the 1960s, and now it is a concept lost to both parties. Economic reciprocity has lost to political reciprocity in trade arrangements. Part of the issue is tied to the death of nationalism, which was part of McKinley’s vision. Furthermore, the main pillar of McKinley’s Dinner-Pail Republicanism was American exceptionalism, which passed away in the 1970s. Today the heart geographically of McKinley’s political strength is called the “Rust Bowl.” The once great factories of the industrial heartland have broken windows as Henry Clay had predicted in 1814. The great bronze busts of the pantheon at the McKinley Niles Memorial are no longer recognizable to young visitors. But if there is to be a renaissance of American Manufacturing it will be found in the McKinley pantheon in Niles, Ohio. It is here that some Joan or John of Arc will rise from America’s rust belt.

McKinley had learned what Henry Clay had known before him. Protectionism while good for the nation’s overall manufacturing was many times industry specific and regional specific. As with Clay voting to protect American industry often had local backlash. Protectionism, like its antithesis free trade, works as a ecomonic policy, not as a set of economic principles to be applied. Political compromise and trade-off would always be required. Even Adam Smith made exceptions for British shipbuilding in order to pacify critics. McKinley would learn to compromise in the future suggesting reciprocity with certain nations and products. Furthermore, McKinley believed with Henry Clay that Congress’s function was to review and monitor manufacturing tariffs. This is the cornerstone of managed trade-reciprocity and review. Both Clay and McKinley developed a congressional committee to oversee the tariffs. Still, in the end Congress preferred debate to the work of monitoring. It is this approach that can lead to true free trade.

Even today economists still point spuriously to the tinplate industry of the 1890s as a failure of protectionism.13 Tinplate, however, is a biased example. In 1890 tinplate was made from mostly imported rolled high quality iron. The tin-platters coated the rolled iron plate with tin through a rolling or coating process. Most of the tin came from Wales, which drove domestic platters costs higher. Two-thirds of their costs were in rolled iron as a raw material, which came mostly from England, thus a tariff on imported rolled iron products drove tinplate prices high as well. The Welsh producers had an inherent advantage by processing the world’s major tin deposit at Cornwall. In effect, Wales had an international monopoly on tin and tinplate. In the short run, the McKinley tariffs did increase the price of tinplate, but the high price spurred exploration for tin and increased technology investment in tinplate and canning. The tinplate industry itself, however, became a major employer in the United States, and prices dropped as the industry matured. Welsh tin-platers immigrated to the United States to set up shop, further building the domestic American tinplate industry. The Welsh brought their “secret powders,” but Americans learned fast, and in the end the McKinley Tariff broke a world monopoly and cartel on world tinplate.

Prior to 1890, there were a handful of tinplate manufacturers in the United States, but by 1892 there were 200 producing 13,000,000 pounds of tinplate! The tinplate industry suffered from Britain’s monopolistic control of both tin and the iron substrate. The tinplate industry suffered from high priced imported iron and steel because of no domestic production, which allowed importers to charge whatever. At the same time

13 D. A. Irwin, “Great Tariff Debate of 1888,” Journal of Economic History, March, 1998

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cheap tin- plate and tinplate products were imported cheaply, which suppressed the development of a domestic industry. Many feared that England would increase the price of “black plate” needed for tin plate production. The American producers, however, responded as McKinley had predicted producing 5,000,000 pounds of black plate in 1892. The mills “found” the technology that free traders said America lacked. Fifteen months after the passage of the Tariff of 1890, McKinley toured a new state-of-the-art tinplate mill built in Ellwood, Indiana. Tinplate is actually the example of what is needed in a managed approach to trade.

The price of tinplate dropped dramatically by 1895 as the McKinley tariffs created a very competitive iron industry and technology improved through putting profits back into the business. As the price increased, American investors poured into the tinplate and canning industry. McKinley, as a Union Army quartermaster, knew well the shortage of canned food to supply the army. The tariffs not only brought investors into tinplate, but into the biggest use of tinplate -canning. During the Civil War a tinsmith could make sixty cans a day; by 1880 a two-man machine could produce fifteen hundred in one day. In general, the period from 1880 to 1910 saw one of the greatest growth rates for American industry ever. By1900 McKinley had turned the public perception around; one of the slogans for McKinley’s presidential reelection would be a “full dinner pail.”

The automation of the Glass industry and American leadership is another example of the successful impact of managed trade. Protectionism or managed trade during the last half of the 19th created a surprising result in the advance of American technology through investment in research and development. The period represented one of great periods of market stability. Men like Michael Owens, Edmond Libbey, Andrew Carnegie, and Charles Schwab were able to invest in technology for the long term and be relatively sure of the future product price. If you take the last half of the 20th century, most manufacturers were facing a downward spiral in prices as cheap imports flooded the market. It made it difficult to invest in research and developments, realizing the market may well disappear. Of course, some would argue that research and development is needed in such a market. The facts, however, suggest that research and development is cut in a declining market and price trend. Investment dollars in such a market tend to be focused on cost cutting and operating improvements. William McKinley’s managed trade seemed to offer a wide range of advantages to manufacturing.

Coming from an iron manufacturing family in Niles, Ohio and representing an industrial congressional district centered on Canton, Ohio, McKinley was protectionist in a much different light than most people today. Protectionism was needed in his view, for American capitalism to flourish in a world dominated by international monopolies. In 1882 in congress McKinley answered free traders in debate:

“ England wants it [free trade], demands it—not for our good but for hers; for she is more anxious to maintain her old position of supremacy than she is to promote the interests and welfare of the people of this republic, and a great party in this country voices her interest…. She would manufacture for us, and permit us to raise wheat and corn for her. We are satisfied to do the latter, but unwilling to concede to her the monopoly of the former.”

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McKinley’s full implementation of managed trade in the 1890s certainly statistically demonstrated the power of managed trade versus unmanaged tariff free trade. Today our industries struggle against huge foreign monopolies. Our government strips any monopolistic growth internally, leaving our manufacturers at a further disadvantage in the world market.

The success of the McKinley tariffs, however, must be considered a result of a faith in American exceptionalism. The latter half of the 19th century was the best of America’s belief and commitment in it. American exceptionalism and nationalism kept capital and investment in America. It was a patriotic alliance between American industrialists and the American government. Today we lack both that alliance and a belief in American exceptionalism. America and particularly our government must choose whether our mission is one world globalization or American exceptionalism. It’s our lack of vision for American manufacturing that is the deeper problem. We sacrifice our manufacturing to help spread “capitalism” and democracy, but we are best when we are the light on the hill. We offer nothing as a mere state of the world. Even if mere world statehood is to be our goal, it is not our governments or that of economists’ decision to make, but that of the people.

After labor, energy is the core of manufacturing. Energy even more so than labor has been the limiting factor of manufacturing. Energy has historically limited manufacturing growth as in Germany and Japan. And certainly, cheap energy has historically been the root of American manufacturing success more so than cheap labor. Labor and energy are the core of manufacturing. Success has in manufacturing been limited even more by energy than labor. When nations have been short on energy, they have been extremely limited in their ability to manufacture. Historically, America’s manufacturing success has been more related to cheap energy than cheap labor. If we choose to limit our energy resources, we will be unable to compete in manufacturing or we will be unable to sustain our higher wages for labor. Low energy resources have historically been more limiting than any other resources. Cheap energy in the United States has historically offset our higher labor costs even in the 19th century. The idea that cheap energy has been part of our high standard of living and jobs is often overlooked. Our present course of free trade, high wages, good benefits, high standard of living, and restricting energy resources cannot sustain a manufacturing industry, and in long run, standard of living and wages will cycle down. We need to find ways to drill safely for oil, apply nuclear power, develop natural gas applications, use our world advantage in coal reserves, and expand wind and solar power. We cannot focus narrowly on only one or two, we need to have abundant and cheap energy to run our factories and employ our citizens. Managing trade and increasing energy is the only way to sustain the manufacturing benefits of high wages, good benefits, and high standard of living.

Government Intervention, Bailouts, Bridge loans etc.

The cries of 2008 were the downfall of American capitalism had been ushered in with the bailout. Conservatives and even liberals cried let the market decide. Bailouts and government loans were socialism or at the very least anti-capitalism. Many quote the Federalist papers against government intervention. As with Adam Smith’s thesis, the

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father of the Federalists, Alexander Hamilton is misquoted, misunderstood, and most often misrepresented. Alexander Hamilton was the antithesis of Adam Smith. Smith didn’t see or consider manufacturing in his views of free trade development and reduction of government intervention. Smith’s world was agrarian and government intervention met tariffs on crops. Hamilton’s world was manufacturing and manufacturing had much greater capital needs. Alexander Hamilton would have supported any government effort to increase manufacturing. Hamilton’s view of government was as a facilitator, not as a supervisor. Government was to oil the gears of capitalism. He considered the promotion of manufacturing as a function of government. Hamilton took the time to study the importance of manufacturing concluding the manufacturing not agriculture was the soul of the nation. Hamilton specially suggested: “protective tariffs or prohibiting the exportation of competing manufactures until American producers in a given industry were firmly established; prohibiting the exportation of raw materials; granting bounties and other direct subsides; awarding premiums or prizes ‘to reward some particular excellence or superiority, some extraordinary exertion or skill’; exempting imported raw materials from duties and granting drawbacks of such duties; encouraging invention; inspecting manufactured products; and facilitating internal commerce through an extension of the banking system and improvement of transportation facilities.”14 This could be a single plan today for American manufacturing re-birth!

Furthermore, Alexander Hamilton’s proposal of a Bank of the United States was a pure injection of capital into the manufacturing and commercial system. The national bank would be owned by the government and would make direct loans to manufacturers and commercial developers. In 1791 Congress approved the Bank of the United States, which was instrumental in the development of the nation’s industrial expansion in areas such as Pittsburgh. While the bank had a twenty-year charter, it was renewed but ultimately destroyed by President Andrew Jackson. Today’s government bridge loans and even money for industry upgrades is clearly Hamiltonian and Federalist. Under the Federalist view it is not only necessary but also a requirement of a government. Remember the Bank of the United States made money available for industry, but it did not take an equity or management role. Hamilton saw the promotion of industry and invention as fundamental to America’s long-term future. Conservatives have in particular lost their roots. They have allowed liberal thinkers to provide money to industry, but with strings of management intervention, equity ownership, and product selection. It is the difference between a future of American manufacturing capitalism or socialism. Socialism acknowledges the importance of manufacturing, but in the case of socialism, government control and ownership is the answer. With socialism ownership is with the government, and that is the line where government loans move toward socialism.

Hamilton went further in his view that only money applied to manufacturing and agricultural is productive versus paying down debt or buying foreign goods. Hamilton argues: “useful employment [of money] be not found for the money of foreigners brought to the country to be invested in purchases of public debt, it will quickly be re-exported to defray the expense of an extraordinary consumption of foreign luxuries . . . useful employment too ought to be of a nature to produce solid and permanent improvements. If the money merely serves to give a temporary spring to foreign commerce [which most of

14 Forrest McDonald, Alexander Hamilton, New York: W.W. Norton, 1982), p. 236

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our recent tax cuts and bank bailouts have gone to] as it cannot procure new and lasting outlets for the products of the country, there will be no real or durable advantage gained. As far as it shall find its way in agricultural ameliorations, in opening canals, and in similar improvements, it will be productive of substantial utility.”15 Government “intervention” was conceived by the Federalists before Karl Marx was born. Hamilton would have clearly supported tariffs on Chinese products, and the government injection of money into American industry as well as the banking system.

In the 2008 Congressional hearings on the auto bridge loans, the UAW President threw an important Hamiltonian pushback pitch to the Senators. He clearly stated the auto industry problems were not their own, but government. He stated the total lack of trade reciprocity, government product decisions, and a lack of a national industrial policy. Neither party addressed his issues. It is easier to blame the industry and the union for bad decisions. The fact is that government trade policy and environmental standards was the elephant in the hearing room that no one seemed to see. Senators cried about the lack of producing alternative energy cars that the market did not want. They blamed the auto industry for not adapting to the high price of oil, which the government created with limitations of nuclear plant building, oil drilling, and coal usage. America is the world’s greatest reserve of energy, which cannot be used, have driven costs and limited growth. The fact is the manufacturing for years has had to march to beat of the drum of government versus the free market world. Usable energy sources are not determined in America by cost or availability but my law. If the government is going to determine what energy is used than it should have a plan to re-tool the industry to function in an artificially created world.

Finally the world of Hamilton (as well as McKinley) was just as foreign to us today as is Smith’s. It was a world without large corporations, international corporations, corporate taxes, and income taxes. We have different tools to promote manufacturing, such as tax credits, investment credits, reduced capital gains taxes, and deductions. These are tools that Hamilton (or even McKinley) would have embraced to promote American manufacturing. There are other economic complications in currency value.

The Myths of Managed Trade

Myth: Free Trade is the Economic Ideal

This is the basis of the World Trade Organization. The Ten Commandments are ideal also, and it is just as unachievable to expect every human to follow them perfectly. Designing a nation on the assumption that all citizens will follow perfectly the Ten Commandments would be silly, yet the World Trade Organization is trying to do the same thing with free trade. The problem with free trade is that it is duty-free trade that is 15 Alexander Hamilton, Report on Manufactures, January 15, 1790

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neither free nor fair. True free trade among nations would require a standard world currency, equality of world wages, and equivalent sharing resources. Political, military, and economic competition would have to be nonexistent, and on the level of those between Michigan and Ohio. The teaching of managed trade or anything but free trade is effectively banned at universities in business schools. Business students believe free trade is inherent to business operations, and a necessary requirement for capitalism. The closest thing we have to free trade is trade between the 50 states of the United States. The biggest problem is our universities where free trade and capitalism are taught as one in the same thing.

Myth: “Free Trade Capitalism” or Free Trade is the basis of capitalism

Free traders always make the linkage with capitalism. Reporters say “Free Trade Capitalism” as if it is one word. This is the premise used to put free trade in the conservative political column. The fact is that the capitalism of the United States, Britain, and Germany achieved the greatest heights under protectionist policies. Capitalism not only assumes that companies compete but so do nations. China’s trade policy is nationalistic, managed, and capitalistic; it mimics that of America’s golden manufacturing period of Republican tariffs. Globalization has moved capitalism to a new level, that of nations. China and India, as did twentieth century America, use managed trade to achieve prosperity and growth. The real capitalistic spirit can be found in China today. True free trade is more the ideal of world socialism than capitalism. Amazingly, probably because universities have shut down debate, and on the other end some conservatives have elevated free trade to that of taxes. A well-managed socialistic country, such as China, will defeat America economically under our own banner of free trade. America is already weak in manufacturing areas such as vehicles, steel, oil, castings, forgings, energy, and mining. Economic blockages such as oil could cripple us on the battlefield.

Myth: Protectionism caused the Great Depression

This is probably the myth loved most by free traders because it evokes fear. First one needs to realize that America had been strongly protectionist since the presidency of Abraham Lincoln. The highest tariffs came with the McKinley Tariff of the 1890s, which ushered in a period of world supremacy of American manufacturing. The infamous Smoot-Hawley Tariff of 1930 was a bit larger, but it was not the cause of the depression. The Smoot-Hawley added to a world trade war as the world moved into depression, but it was just one of many errors (there was a tax increase as well). The Smoot-Hawley Tariff was not a managed trade tariff but all out across the board protectionism. The great tariffs of the 1800s were managed by congress according to economic needs and goals. Tariffs were much like other economic tools of today such as taxes, government spending, and the money supply. All trade tools need to be surgically used and monitored. America needs a manufacturing policy that can use all tools to achieve national goals. The loss of manufacturing by any means is the primary root of economic depressions- simplistic but true.

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Myth: Adam Smith suggested complete free trade among nationsTrue but he also used hundreds of pages to note the importance of currency

balance. He was just as much against government interference at any level. Holding a currency artificially low to sell more products is government inference on the same level as tariffs. Government aid in socialistic countries to help high employment industries is on the same level as tariffs. This is the real issue when we talk free trade; it’s really duty-free trade with government supported foreign industry. Free trade just isn’t possible in the foreseeable future.

Myth: Managed trade and Protectionism is Government intervention

Of course it is but so what. This is the argument made to kick managed trade out of the conservative column. The balance of trade is economic war and defense is a valid role for government. Free trade is an illusion, trade is an economic weapon. When you have a country that has set world economic leadership by any means, government protection is needed. There is always a danger in putting government in charge of anything but defense and trade are necessities. Government will draw in politics, but that is the heart of democracy. Government has always had the role in a democracy to protect the people against economic abuses. Adam Smith was right that business is self-interest, and America learned that capitalism had to be monitored. Why is it that we correctly don’t trust unregulated big business, but trust the world’s big governments to trade fairly? Trade must be managed to assure balance, it’s tough work and requires what McKinley had in a full time commission. Greed has to be addressed, and there are times that foreign competition might help. Political systems promote self-interest also. The only role of the American government in international trade and politics is to represent the rights and wishes of the American people. Government has no right to trade American jobs for political concessions or ideologies. America is to be the beacon of democracy, not the merchant of democracy.

Myth: Loans to companies like auto manufacturing are socialismPromoting manufacture is a duty of a capitalistic nation. Alexander Hamilton

made that clear in his 1790 report to congress. Compared to loans and bailouts made to financial institutions, loans to manufacture have produced jobs and money for the American people. Of all the ways government can spend money promoting manufacturing returns it to the people through jobs and standard of living. Capitalism lacks a soul without manufacturing. Capitalism cannot be sustained by retailing alone. Even trade requires manufacturing. Furthermore, manufacturing is the gateway to the middle class. Without manufacturing jobs a nation cannot sustain growth. Manufacturing, democracy, and capitalism are the troika of horses for economic growth. They are interrelated and interdependent, neither function well alone. Where loans and bailouts move us toward socialism is when government becomes involved in the management of the company or market. Loans not equity positions in manufacturing. Using taxes to

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change the nature of manufactured products is socialism. Hamilton called on government to promote manufacture, not become involved in it.

Myth: Tariffs will Increase Prices

It is not necessarily true and clearly wrong in the long run. Lack of competition will increase prices. During the great McKinley tariffs of 1890 to 1920, prices when down as American competition increased and stabilized markets encouraged long term investment in technology and new equipment. This was exactly what Alexander Hamilton predicted in 1794. Cheap prices mean little to the unemployed worker. Hamilton made this point that targeted tariffs can actually reduce prices, and the Republican policies of the 1800s proved the point.

Myth: Free trade promotes Democracy and Freedom

Free trade erodes the very heart of your nation. Free trade, if possible, assumes equality in the world. The world is far from equal. America is exceptional in individual freedom and that allows enormous financial opportunity. I know that this approach is not popular today and even borders on the dangerous edge for many. Americans are better in the giving freedom, and they should be rewarded for their sacrifices and efforts to lift up mankind. Freedom comes at a price and cost. The sacrifices of American labor demands a wage premium. Trading with economic slave nations is neither free trade nor the way to spread democracy. Entry into our markets must recognize the sacrifices of our workers for freedom. American capitalism should lead the world for it allows man to achieve his dreams. We need not support systems that actually suppress human creativity, ownership, and innovation. Look at where cheaper goods are coming from, and then decide do these laborers have the freedom and protection of American laborers. The tariff and its possible increase in prices for the consumer should be considered a down payment on freedom.

Myth: Capitalist Owners will pocket the gains from high tariffs

It’s a possibility, if things are not managed. Unmanaged across the board tariffs are not better than free trade. Neither represents free trade. In a world of different governments, cultures, belief systems, currencies, polices, and needs can trade really be free? This is the very heart of the issue. Everybody wants free trade on what they need to purchase, but wants their job protected. Trade is on the level of defense, in fact, they are interrelated in today’s world as they have been in the past.

Myth: The idea of an industrial policy is socialistic and/or communistic

Policy is not control. Policy sets direction. Hamilton’s report on manufacturing to President George Washington was the basis of American nation. Hamilton set a vision of a manufacturing utopia and molded government policy to achieve it. The un-coordinated, almost haphazard, approach of the government today has created confusion.

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Manufacturing is rapidly disappearing, and government sees it as free market. China, like Japan, before it was set a policy to be the world’s workshop, while the United States sees itself as spreading economic freedom, as it props up countries determined to see our end. China violates intellectual rights to take away the American creative advantage, but the government does nothing. Something is seriously wrong and its not the American worker or manager.

What needs to be done?

1. Economic Reciprocity

Look at the countries where the trade balance is most out of line. I was always a great admirer of Japan, and I think the present Japan/United States economic policy is the ideal. Japan has and is building new manufacturing plants in the U.S. This is an example of the principle of economic reciprocity. Reciprocity must be applied in the global market. The major argument with today’s trade policies is in the mixing of politics. The trade status with the United States is not based on economic reciprocity, but politics. The selling off of American jobs for political favors or to spread democracies is wrong. The base hope of democracy in the world is an economically strong America. Free trade should be based on the fairness of the economics, not your politics. The obtainment of “most favored trade” nation should be based purely on a country’s economic behavior. Maybe just as important is that trade decisions must reflect the will of the people, not philosophical positions or government. Another step is the enforcement with any trading partner of intellectual property rights. Political tradeoffs should never be accepted unless it is the full will of the American worker and taxpayer. The American government’s only right for existence is serving the will of Americans. Some industries must be protected against unfair trade or even protected to assure American employment. The American dinner pail must be filled first! Americans must change the attitude of at least one party to take real action.

2. The government needs stimulate industry or get out of the way

Today you have another incentive to protect home industries or at least simulate home industry growth. The government relies on and demand that big business cover health care and retirement, putting American industry at an enormous disadvantage. Our higher standard of living is related to the success of our industries. You either have to protect these industries or you will have to have government foot the bill for array of benefits. American industry cannot keep working with such a

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disadvantage. I would have probably set a tariff to cover the difference in health and benefits. It is frustrating to look at the position of American industry today. Finally, if government feels that it must be free traders than it should take on the responsibility for health insurance and retirement, since international companies are not burdened by these costs. Our policy today is to burden our companies while encouraging international companies to compete unfairly.

Government has imposed taxes on industry, decides what energy it can use, and limits the type of product. Today’s mess is that of government, not business. Government feels it knows best. Its “free” market policies had destroyed industry after industry. Government needs to regulate against abuses, but it needs to get out of the business of business. What the government lacks is leadership and direction. If the government wants to pursuit its insane policy of free trade than it needs to pick up the cost of health care and pensions to put American industry on equal footing. If coal is a dirty fuel than government should be giving research funds to make it clean, and the same goes for the problems of nuclear. The government seems only to know how to ban versus improve. Its lacks a direction that countries like China and Japan have.

The government today has a number of tools that Hamilton, Clay, and McKinley lacked. Besides tariffs, the government has the ability to use tax incentive to change the habits of the customers, and encourage manufacturing investment. We can use incentive to advance technology, as in the case of electric cars. Incentives on taxes are a more favorable to outside competition and can be a compromise for “free-traders.” Research grants to universities are another tool that government can use to advance technology. The government needs to realize that their money is from the workers of America, and its first priority should be American jobs.

Finally, tariffs can work without the extreme result of trade wars. It requires the type of managerial oversight found in the McKinley approach. It might even require a cabinet level position to balance manufacturing and tariffs. One of our last remaining assets is the size of the American market; no one really wants to risk a lost of the American market. It is possible to protect industries such as automotive and steel at levels that still allow plenty of trade.

3. A National Manufacturing Policy

To develop a national manufacturing policy, one must look to Bismarck’s national socialism, McKinley’s “dinner pail industrialism,” Roosevelt’s New Deal, and 18th century Britain. Nationalism has been part of economic success because it realizes that trade is interaction between nations, not intra action. A trade between two nations is a complex exchange of value. The exchange is more than monetary it is an exchange of political capital. Trade is not only influenced by the currency exchange rate, but it in turn can affect the exchange rate itself. Trade can impact in many ways the very ability of a nation to defend itself. Alexander Hamilton first realized this as he looked to build a foundation for a new nation. Amazingly, socialists and capitalists come to the same conclusion as to the role of manufacturing in nation building. America in affect had a Secretary of Manufacturing with men like Alexander Hamilton, Henry Clay, and William McKinley. Today we lack leadership

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and policy. We also lack manufacturing champions. We need to once again rise manufacturing to a cabinet level position.

4. Education

The struggle to create a manufacturing renaissance will be based on education. Manufacturing education is needed on a philosophical level, not in techniques. American universities and those of most western countries teach only “free market capitalism” and the economic principles of free trade. It started after the Great Depression in economics, which is often in a school of liberal arts. Free trade is considered a scared principle in economics. Trade is also considered a means for social world change. Liberals consider protectionism a tool of world capitalists to oppress poor nations. Conservatives see free trade as necessary for capitalism. It is one of the few things that extreme liberals and extreme conservatives agree on. President Clinton and President Bush were both free traders. Part of the reason is its dominance in the educational system. Socially, the protectionist is perceived as a red-neck, flag waving, uneducated, NASCAR hillbilly. Historically, protectionism or managed trade is a conservative value, but the educational system has negated its value. Just as devastating to American manufacturing is the one world thinking of our educators.

A manufacturing renaissance will require a revolution in thought. And that revolution requires a major crisis to change thinking, or a slower revolution in educational circles. Free trade is so ingrained in our thinking it may require a crisis to force a new look. The problem with managed trade is that intellectuals often defeat it because the population does not see a connection to their personal life. Autoworkers and steelworkers understand the results of “free trade,” but their problems are pictured as unique as our economy shifts to a “global” economy. They are portrayed as horseshoeing blacksmiths in a world of cars. Ignorance hides the truth. Many years ago I was in the Jaycees, doing works for the community with other aspiring professionals in the Pittsburgh area. Most of my follow Jaycees were doctors, lawyers, and dentists, and my position as an operations manager in the steel industry was not well understood. The struggling steel industry, like the automotive industry, of today had little sympathy for its decline. We all lived in an up scale Pittsburgh suburb not far from the massive steel mill of Aliquippa, but I often felt in a different world. One of the members, who was an eye doctor was opening his first office. The opening was a champagne and shrimp affair.

The news of the time was the closing of steel mills on the other side of Pittsburgh. The eye doctor was quick to tell me during cocktails how those overpaid steelworkers were their own worst enemies. I talked of American cars and he pointed to the high quality of his two German cars. He was amazingly ardent, predicting that if American products could not compete than those industries must disappear. A few years later the great 9-mile long steel mill at Aliquippa closed. Sixteen months later the doctor learned some market place economics not taught in schools. His customer base collapsed! Those overpaid steelworkers had eye insurance for the whole family. They could get a new set of eyeglasses every year and examinations every six months. With thousands out of work the hardest hit were not only retailers, but also

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doctors and dentists. This particular eye doctor ended up in bankruptcy court. Today, as struggling companies no longer offer health insurance, many are feeling the true cost of health. Community public schools are feeling the budget cuts of a declining tax base. There are social costs too such as the increase in crime rate. Even Silicon Valley once said to be a free market replacement of our great heavy industries has moved on to Asia. We move on believing this type of economic change is natural and necessary as industries and plants fall one at a time, while China and other countries rise unencumbered by free trade economics. We are told we are an “informational society,” while we watch others collect, manipulate, and apply information to manufacturing.

5. A focus on science and engineering

America has fallen seriously behind in science and engineering. We now import our engineers and scientists. Our educational system lacks teachers in science and education. Even worse is that as a nation we lack interest in science and engineering. A non-manufacturing society has little need for scientists and engineers. The 1940s and 1950s birthed a generation of American scientists and engineers that changed the world. It was a world driven by manufacturing, and manufacturing created the capital for not only hiring engineers, but paying for basic research at our universities. Today, everyone talks of getting more science teachers in our schools, but they miss the economic fact that without manufacturing there is a reduced need for engineering and science. Government is unlikely to solve the problems without high paying jobs for scientists. These same free market economists don’t see the connection between manufacturing and science. Even Green advocates fail to realize that industry offers the best source of capital and science resources to solve the environmental problems. When industry is supplying high paying engineering and science jobs, parents get interested in having their sons and daughters become engineers and scientists. Parents start buying and demanding toys like chemistry sets so common in the 1950s. They feel good about financing college education. Professional engineering societies need to push grade school programs to develop scientists and engineers. But why would anyone invest in an engineering degree or physical science degree if high paying jobs were not available. We cannot push engineers and scientists through the system; we must pull them through with economic incentives. Like everything it probably all gets back to our lack of an industrial policy as a nation. It needs to pull engineering students through the system, not push them. The space program inspired generations of engineers and scientists, but we have lost that. Politicians have missed out in setting a national goal of alternative fuel cars, which could build the motivation we have lost as a nation.

6. American Exceptionalism

Believe it not because of being American, but because Providence has given us the opportunity to be the light and the beacon of freedom. Exceptionalism is not greed or even nationalism, but a hope and belief that free men can achieve anything. Believe because it has been passed down to us, but most importantly

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believe for our future. A nation without a dream can never lead, and has no destiny. American exceptionalism places ecomonic value and rewards on freedom. Freedom comes at a cost and the cost should be reflected in our products as well as our blood.

Dabit dues his quoque finem

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