Senate Democrats and Republicans announced a breakthrough Wednesday on one of the Biden administration’s high-priority physical and social infrastructure bills. If enacted, these measures would deliver the largest expansion of government economic activity in generations, and would abruptly shift the four-decade federal retreat from investment, spending, employment and regulation of the economy.
Pundit David Brooks calls these measures a departure from the “American system” of economic governance. Sen. Cynthia M. Lummis (R-Wyo.) argues that they would “overhaul our economy and society.”
But in fact, if passed, these bills would return the federal government to its more familiar historical role in bolstering and directing the nation’s growth. Until it reversed its approach under the Carter and Reagan administrations, throughout U.S. history, the federal government has consistently taken massive action to shape economic activity and promote development.
Here’s what you need to know about the past and present of the federal government’s role.
Origins of the ‘American System’
The “American System” was developed by the first U.S. treasury secretary, Alexander Hamilton, and named by Rep. (later Sen. and Secretary of State) Henry Clay (Whig-Ky.). Putting the federal government squarely at the center of the U.S. economy, this approach levied large tariffs to protect infant industries, established a national bank to oversee credit in the economy, and developed a funding system for a massive series of what were then known as “internal improvements” and which we would today simply call infrastructure.
Hamiltonians didn’t get everything they wanted; in 1833, President Andrew Jackson notoriously shut down the national bank. But from New York state’s building of the Erie Canal in the 1820s, to federal subsidies for the transcontinental railroad in the 1860s, to air postal routes and the interstate highway system in the 20th century, the government has worked actively to develop the economy and physically link the nation together. At the same time, the United States has consistently led the world in government-funded education, from creating land grant colleges in 1862, to developing and expanding public high schools in the early 20th century, to the California master plan for higher education of 1960.
Hamilton’s wide-spectrum vision of state-led economic development was brought into the next generation by Clay, and admiringly explained to the world by German historian Friedrich List. List presented the American system as appropriate for any nation that wanted to compete successfully with the British Empire. At various times, the Germans, the Japanese and more recently the South Koreans and Chinese have taken up its principles.
State power by popular demand
Another European visitor, Alexis De Tocqueville, was similarly impressed by the U.S. system. He admired the fact that the government was everywhere and powerful, deeply entangled with civil society. As he pointed out, small-d democratic nations can more effectively compel their citizens to follow the law than can monarchies, because creating laws democratically grants them legitimacy.
In the United States, mass democracy has often led the government to directly regulate economic activity. As early as the 1820s, American farmers were teaming up to demand democratically directed development policies. Farmer pressure ultimately led Congress to create the U.S. Department of Agriculture in 1862. A primary goal? For the federal government to protect consumers against fraudulent advertising of fertilizers and other agricultural technology. Similarly, at the end of the 19th century, Congress and the president created the Interstate Commerce Commission, a government agency with powers to directly intervene in private corporations’ affairs, a power unmatched by that of any European government.
In other words, while some observers argue that there’s a trade-off between state intervention and economic dynamism, across most of U.S. history, an energetic public sector has made possible American economic growth.
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The U.S. tradition of redistribution
Using state power to rein in the wealthy is also a U.S. tradition. More recent European observer Thomas Piketty pointed out that Americans invented punitive, progressive taxation. Early 20th-century reformers didn’t just want to efficiently raise revenue; they wanted to grind the rich down to a more modest size so as to forge a more economically — and therefore democratically — equitable union. Reformers created anti-monopoly laws for the same reason: not to stop private corporations with overwhelming market power from distorting competitive pricing, but to save small producers who were too inefficient to keep up with larger competitors, and thus to prevent the rise of an American aristocracy.
Movements to regulate business activity and redistribute wealth have not been driven just by populists or those on society’s fringes. Consider Waddill Catchings, who used his position as head of Goldman Sachs in the 1920s to develop and promote the argument that if workers didn’t start receiving higher wages, the U.S. economy would be at risk. His advisers included such radicals as Henry Harriman, president of the U.S. Chamber of Commerce, and Marriner Eccles, chair of the Federal Reserve. After World War II, business and labor leaders largely agreed that the nation needed an equitable income distribution to preserve macroeconomic stability.
With the American Jobs Plan and the American Families Plan, the Biden administration and congressional Democrats seek to return the federal government to its historical role as a key driver of U.S. prosperity and development. We will find out whether they succeed.
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Robert Manduca (@robertmanduca) is an assistant professor of sociology at the University of Michigan.
Nic Johnson (@TiltingatM3) and Chris Hong are PhD students in history at the University of Chicago.
Together, the three authors curate Reviving Growth Keynesianism, a project to explore the history of U.S. economic thought.