A Manufacturing Manfesto

To Our Lady of Perpetual Help, whose picture hung in the homesof tens of thousands of steelworkers in Western Pennsylvania in the 1900s Vox clamantis in deserto 1

The PantheonThe Manufacturing Manifesto is a result of years of research into the Goldenperiods of American business and capitalism. It has produced a number of iconicbiographies. At the seat of Jupiter is President William McKinley, who developed amanaged 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 WilliamMcGuffey, America’s educator, and Henry Clay Frick corporate organizer. ThePantheon of books includes tributes to the many developers of early industry (ThePig Iron Aristocracy, Boys of Braddock, and Iconic Lessons of Operations Management).The many industrial laborers are honored in book A Genealogy of Greatness. Overtwenty of these “gods of business” are interviewed and questioned about today’sproblems in the book-Interviews with the Titans of Business. 2

Read the full PantheonOther Books by Quentin R. Skrabec Jr., Ph.D (The Literary Pantheon)The Boys of Braddock ISBN 0-7884-2516-1George Westinghouse: Gentle Genius ISBN 978-0-87586-507-2The Metallurgic Age ISBN 0-7864-2326-9Michael Owens ISBN 978 1 58980 385 5In Search of the Lost Grail of Middle Management ISBN 0-7618-2551-7Glass in Northwest Ohio ISBN 13 978-0-7385-5111-1Labor Productivity and Profits ISBN 0-7414-3890-9St. Benedict’s Rule For Business Success ISBN 1-55753-254-0Iconic Lessons in Operations Management ISBN 0-7414-2893-8De Metallica Pertia ISBN 0-7414-3559-1Saintly Lessons and Divine Concepts for Business ISBN 156072845-0William McKinley: The Apostle of Protectionism ISBN 978-0-87586-577-5A Genealogy of Greatness ISBN 978-1-934209-46-2The Pig Iron Aristocracy ISBN 978-0-7884-4515-6Interviews with the Titans of Business ISBN 0-7414-4536-0H. J. Heinz: A BiographyWilliam Holmes McGuffeyHenry Clay FrickQuentinskrabec.comTheironpantheon.comOr Search “skrabec” on Amazon.com 3

Prologue For thirty years I have been researching and writing about the golden years ofmanufacturing in America, creating a literary pantheon. I have written many industrialbiographies and I’ am presently extending that literary Pantheon. This Pantheon includesH. J. Heinz, Henry Clay Frick, George Westinghouse, Charles Schwab, AndrewCarnegie, William McGuffey, Edward Libbey, Michael Owens, William McKinley,Charles Goodyear, and many others. I have researched the nature of the immigrants thatfilled the factories as well as the capitalists who managed them. I have studied theeconomics of the 19th century for clues in its creativeness and industrialism. There arethemes 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 manufacturingrenaissance. I grew up in industrial Pittsburgh and managed in the steel industries. I camefrom a family of steelworkers. No sight intrigued me more than the glowing orange nightskies of Pittsburgh that spelled prosperity. I played on the endless slag plies from thePittsburgh steel mills, and found a love of nature in Frick Park named after one ofAmerica’s most committed capitalists. I found a love of learning in the Carnegie librariesand the great Carnegie Museum. Winning a science award from Buhl Planetarium ineight grade, I met a scientific hero in Werner Von Braun. My best Christmas gift was andalways will be my Gilbert chemistry set. I lived through the glories and the fall ofAmerican industry. I got my undergrad degree in engineering from the University ofMichigan, where a learned the automotive industry. While in Michigan I found myfavorite piece of American geography in the Henry Ford Museum and GreenfieldVillage. I have a passion for manufacturing, and ultimately got a PhD in manufacturingmanagement. My whole life has been spent in the “rust belt” from Detroit to Cleveland toAkron/Canton to Pittsburgh. I saw the “final” glories of these cities. We have been toldthat 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 yearsthat free trade is the pillar of capitalism, yet American capitalism saw it glory on theprotectionist (managed trade) policies from 1850 to 1910. Sociologists of the same schoolhave told us what is good for the world is good for America. My conservative brothershave left me standing alone on managed trade. The idea that America is exceptional hasbeen 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 livingmust be reduced. Manufacturers, like me, lament the passing of American capitalism,American exceptionalism, and domestic production. Our prayers and hopes remain in areturn of American capitalism and manufacturing. American capitalism differs from capitalism in that it is specific. It puts apremium on freedom and the pursuit of happiness. That premium is reflected in fairwages and a higher standard of living. It does not ignore the world, but offers a beaconlight for it. It rewards hard work and those that advance society and freedom. It allows forAmerican exceptionalism. It was only in 2000 that I visited a shrine to that type ofAmerican capitalism. The shrine sits in the heart of the rust belt in Niles, Ohio. It is herethat America’s great industrialists honored their fallen President William McKinley. It is 4

a pantheon of bronze busts of forgotten heroes that has inspired my life quest of buildinga literary pantheon of American capitalism. It is doubtful that any American school childtoday would recognize these rows of bronze. I believe that America will have amanufacturing renaissance, but the polices since the 1950s have taken on the oppositepath. This manifesto offers a different path. It details a renaissance as much as arevolution in manufacturing. It goes belong merely opening old factories, and suggests anew type of manufacturing. A Manufacturing Manifesto We are still awaiting the Manufacturing Revolution. The Industrial Revolutionwas merely one of quantity and methodology. The Manufacturing Revolution will bewhen the mind of man, not the hand of man does the manufacturing. It will represent theconfluence of information systems, computer technology, and robotics. It will be one ofman’s greatest ages, far surpassing the “information age.” It will be an evolutionarychange more than revolutionary. It will require having infrastructure in place. Thisconfluence 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 thatCarnegie-Mellon tests its robots. This is more than symbolic, the manufacturingrevolution will be born in the factories of the industrial revolution, and that process isunder way. Whichever country wins this revolution will be the next super-power. It willbe a social revolution as well, where robots replace cheap labor or highly productivelabor replaces that of cheap hands. The struggles of labor and capitalists will changedramatically. 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 robotictrilogy. It will bring new challenges with its many blessings, but it will requireinvestment and innovation now. Future success is dependent on creating a vision today.Another often-overlooked part of any manufacturing thrust will be abundant and cheapenergy. 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 hismanufactured tools. Even the Bible marks man’s advance in terms of manufacture,progressing from Tubalcain, the father of all manufacturers. Early primitive Americancivilizations are distinguished on the manufacturing prowess to move from the Clovis toFolsom point technology. The Folsom point representing the best of flint pressure-flakingmanufacturing, which opened up new horizons in hunting larger game. The Assyriansmanufacturing skills created one of the world’s first great civilizations, as did theEgyptians. These were societies built on manufacturing and building, as were theirmilitary empires. The Hittites built the first iron-based civilization and ruled most of theknown of the west with their metal working superiority. The Philistines held Israelcaptive by not allowing them the knowledge of working metals. 5

Manufacturing remained the heart of ancient civilizations regardless of political orsocial organization. As early as 1700 B. C., the Chinese had developed a nationalindustry of trades under the autocratic rule of the emperor. Official state workshopsranged from a few hundred employees to thousands of employees. The Song Dynasty inthe seventeenth century B. C. established a national Ministry of Works. The craftsmenlived 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 ofmanufacture was considered a reflection of the nation’s soul. This type of nationalisticpride 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 aggregatecraftsman. It was the type of manufacturing pride seen in the World Fairs of the 19th andearly 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 inagricultural productivity. The Egyptians, Greeks, Romans, Hittites, Persians, Chinese,and other were all expert builders and manufacturers. The lesson of western nations isthat the failure to develop and maintain manufacturing has resulted in the fall of greatempires. Many may argue that today we are in the Information Age, and that will be thebasis 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 suchas David Hume, Adam Smith, and Henry Kames, agree that the way people of a nationearn their living defines the country’s laws, government, and culture. It should beremembered that manufacturing, science, and industry drive information technology, notthe other way around. Manufacturing is an economic policy, a social philosophy, and thetouchstone of the level of civilization. Furthermore, there is an inherent love of man’s ability to rise above nature, and tocreate and manufacture things. We see it in our love of architecture and building, and inthe earliest playing of our children with toy blocks. We learn by trying to re-order ourworld. Our greatest tribute to our God was in our cathedrals and churches. Manufacturingis the touch mark of the human soul. It is even reflected in our great literature such asRobinson Crusoe, which birthed centuries of novels down to this day. The Robinsonadewas the technique of the master fiction writer Jules Verne, which hailed man’s ability tosurvive through primitive manufacture. We never lose interest in watching man createfrom nothing. Manufacturing is part of man’s psyche. An attribute that was exploited bythe early monastic communities of Roman soldiers in Africa. Medieval Europe moved out of Feudalism and the Dark Ages on the back ofmanufacturing. No one understood the importance of manufacturing and the nature ofman better than the monk St. Benedict, whose followers would build over 40,000monasteries throughout the world. It is in the monastic business model that we can findmany answers for globalization, since globalization has its roots in the monasticmanufacturing 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- 6

actualization in man creating with his hands. Monastic manufacturing resulted in arevolution in management, science, and information technology. Their verticalintegration offers powerful lessons in supply chain management. No similar historicmodel offers a successful blend of green and lean. They built green operations thatincluded the world’s first fisheries and forest management. They found energyindependence in the wind and water. While their monastic network was worldwide,stringing hundreds of monasteries together, they found favorable local production to limittransportation costs. It was an energy efficient model with many applications for today.Their great libraries and information collection was related to their need to advancemanufacturing into new areas. Christian monastic communities and monks represent some of the world’s oldestfactories and trade centers. The Monastic business model includes the age-oldmonasteries such as the Benedictines, American communal societies such as the Shakers,and German separatists such as the Harmonists. These manufacturing engines were basedon similar rules for organizational success, and a belief that man finds self-actualizationin his ability to produce. They pioneered industries such as brick, glass, food processing,and iron making. These monasteries revolutionized agricultural techniques, fisheries, andharvesting 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, themonasteries of Europe fed, employed, and trained craftsmen. They employed and taughtthe commoners in agriculture. In the 15th and 16th century, they revived a broken worldeconomy. They were not only economic engines, but also centers of innovation andknowledge. Beyond manufacturing techniques, they established organizational principlesfor economic success. Pioneering the science of Human Relations and personnelmanagement. 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 includethe glass kiln, blast furnaces, assembly line techniques, improved bricks, fisheries, cropmanagement, sheep shears, grinding wheels, water power, turbines, deep mining, andtextile manufacture. Their organization offers the businessperson insights into buildingsuccessful and productive organizations. Probably the most overlooked part of their manufacturing was their greenapproach. Green was a necessity for these monasteries. Resources were often in shortsupply, and their agricultural roots had honed them in recycling. Their sanitary systemswere state of the art. They advanced intensive farming to maximize the use of land, anddeveloped crop rotation practices. They learned to use all parts of the cattle, sheep, andhorses. Reduction of waste, in a resource short world, was the core to their success. LikeToyota, in the 1980s, monasteries realized waste and high inventories cloggedmanufacturing systems. Energy was a limiting factor and had to be conserved, whilesearching out new sources. These monks were efficiency engineers that got the most outof their resources, developing wind, solar, and waterpower. They not only conservedresources, but also through technology and productivity drove manufactured productsprices down. They balanced green and economic needs, allowing manufacturing tobecome an extension of man’s natural evolution. These monks were true organizational geniuses, combining scientificmanagement with group innovation. They were the first to define organizational mission 7

statements and set corporate goals. They combined and utilized Roman law and militaryorganization to build highly efficient factories. They combined Christian principles tomotivate employees. At heart was the concept that manufacture had to be combined withprayer, and through this combination you can achieve self-actualization. They pioneeredpaternal capitalism that was founded on individual improvement. They build research anddevelopment centers that improved all phases of manufacture. They invented the veryprinciples of scientific research. They built great libraries to store scientific andmanufacturing data for improvement. Data mining was used to make information workfor them in their production techniques. Their organizations are the world’s mostsuccessful and oldest. Their principles, techniques, and management approaches aretimeless and the organizations they created. More recently, businesses and colleges haveturned to these principles for competitive advantage. What is at the root of this organizational and economic success? The monasticapproach honors work on a level with prayer, which centuries later would be honored inAmerica as the “Protestant Work Ethic.” In fact, it was 20th century German sociologistMax Weber that attributed the success of American capitalism to its religious based workethic. Weber praised manufacture, as did the monks, as Godly. The basis of these greatmonasteries was their organizational rules, such as the Rule of St. Benedict. These rulesreinforced 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 hadbeen 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 wascreated 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 thefall of the Roman Empire. Their personal experience of the entropy and anarchy of theRoman fall inspired a desire for a lasting organizational order. These organizational rulesoffered the cybernetic guidance needed for stability and growth, and became incorporatedin manufacturing management. It would be the Benedictine Rule that spread order, an inherent praise ofmanufacture, and economic growth. Like the desert fathers of Pachomius, early sixthcentury monasteries worked for basic needs. They applied and advanced agriculturalscience, but self-sufficiency took them into tool making. Monks became skilledblacksmiths to produce plows and carpenters to produce wagons and harnesses. Theyimproved on Roman technology such as the padded horse collar to improve efficiencyand productivity. The core of their manufacturing strategy was self-sufficiency or whatwe would call vertical and horizontal integration. Blacksmithing took them into miningand metallurgy in the seventh century. Blacksmiths produced nails and horseshoes. Theyexpanded into sheep herding to produce woolen clothing, developing iron shears amongthe way. By the ninth century, success allowed them to more into construction, masonry,and brick making. Charlemagne (771-814) recognized their organizational genius, andtheir principles were applied to government and education. By the tenth century, thesemonasteries were the economic engines of Europe. Capitalism was born in the greatsurplus these monastic organizations produced. They moved from self-sufficiency to surplus supply and mass production. Theneed for productivity improvements led to advances in technology. Energy became 8

critical to expand growth, leading to the full application of waterpower and wind powerto power grain mills, forges, winepresses, breweries, glass houses, and iron furnaces. Bythe eleventh century, the monasteries were the food processing factories of Europe.Clothes manufacture stimulated dye and loom technology. As trading and massproduction increased, the monasteries moved into banking to support the economicboom. Increases in productivity allowed for more time to pursue intellectual arts, whichalso inspired the production of paper and ink. Bringing their pragmatic approach toscience, chemistry emerged out of alchemy, physics out of magic, and astronomy out ofastrology. The combination of encyclopedic knowledge and manual arts led to thefoundation of crafts guilds. Monastic principles instilled quality manufacture into thesystem, and manufacturing pulls in science and technology advances just like the pullsystems of inventory control. Today’s businessperson may wonder how the study of “religious” rules mightapply to the business of business. First it would be a mistake to look at monastic rules asprayer books, they were not. They dealt with the practical problems of mission,organization, management, manufacturing, authority, and corrective action. The Rule ofBenedict remains today, the Western World’s oldest living document. It is the onlydocument to fully embrace the pragmatic civil laws, military principles, and organizationof the Roman Empire. The rule understood that manufacturing and crafts were in the verysoul of man. These rules were guides as to how to run a complex monastery, similar toISO 9000 in today’s business world. While ISO 9000 makes for a simple analogy, therules were much more pragmatic, more of a medieval managerial handbook. Whilestandards or rules of today such as ISO 9000 are strategic, monastic rule translatesstrategy into organizational tactics. The rules did not make saints, but created efficientorganizations. No modern standard can boast as Benedict’s Rule, organizations of 1500years. Benedictine organizations that have outlasted empires, religions, government,natural disasters, and nature’s own entropic drive. Benedictine organizations today existwithin every type of political and cultural environment. No simple organizationaldocument has lasted and been used for 1500 years, except that of Benedict’s Rule. Thislongevity and cultural regeneration is the very heart of the Rule, and manufacturing withprayer was the soul of Rule. The success of monastic manufacturing and business is not limited to the MiddleAges, but finds a different renewal in the American 1800s. The early 1800s saw theinflux of Protestant immigrants, mainly from Germany, committed to communal businesscommunities. These were religious communities of families. The largest such as theShakers, Mennonites, Harmonists, and Zoarites were well known for their qualityproducts, and a belief that work is at the heart of society. Like their Middle Agepredecessors, they lived under strict organizational and religious rules. Most wereGerman 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 providededucation, housing, and medical help. The model was highly productive, competitivewith the best textile mills of the time. Robert Owen came to America and the Harmonistsin Pennsylvania and Indiana readily accepted his ideas. The paternal capitalists of the late1800s, such as H. J. Heinz and George Westinghouse, adopted many of Owen’s ideas. 9

These early American monastic ideas formed the basis of America’s goldenmanufacturing era. Countries that do not manufacture are destined to lesser roles. Rome’s final fallsaw it completely dependent on other countries for food and products. Few countrieshave 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 Britainfully embraced free trade theories of Adam Smith. In 1851, a backward protectionistcountry shocked many of the industrial equipment exhibits of the world’s GreatExhibition held in Britain in 1851. Prince Albert was so shocked; he formed a nationalreview to identify the factors in America’s manufacturing success. By the 1860s, Britishmachine makers and tool and die makers were emigrating from Britain to America. Bythe 1870s, an even more protectionist America was leading in machine and railroadequipment manufacture. Britain remained proud and an apostle of free trade. In the1890s, protectionist America eclipsed Britain’s iron, steel, machine, glass, ceramic,chemical, and most other industries. Germany’s Bismarck saw the decline of Britain, andmoved to build German industry like America, using focused protectionist principles.With Britain’s decline in manufacturing came its decline as the world’s superpower. Thepoint is not to favor protectionism over free trade, but to put manufacturing at the heart ofnational policy. Free trade is however, the capitalist’s Achilles heel. It offers new marketsand draws in the capitalist, but then destroys its very home base. Manufacturing is the base of any economic philosophy. Bismarck of Germany in1800s built up industry around his nationalistic socialism. In effect, Bismarck developeda national community for manufacturing. Bismarck moved from national free trade to thetype of managed trade that had led to America’s success. Bismarck believed that workingpeople 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 operatingenvironment would appear to be some form of paternal capitalism such as that of GeorgeWestinghouse and H. J. Heinz. Manufacturing without the hope of someday being a bossor 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 AdamSmith overlooked. Manufacturing supplies the jobs needed for growth, and makes tradepossible. Adam Smith knew nothing of currency fluctuations between nations as we havetoday. 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 inthe heavy industries. Communist countries focused on the development of heavy industrybecause of its pull of dependent demand, its militaristic dimension, and its potential offull employment. Small German and American communal manufacturing communitiesproved highly successful in the 1800s, with the same type of “communist” control topromote manufacturing. Manufacturing can supply jobs and a standard of living, notpossible in trading based societies. China has shown this very power of manufacturing ina mixed political and economic environment. Alexander Hamilton argued that capitalismand manufacturing were sisters, but China is example of manufacturing making anymodel that includes manufacturing an economic success. Still, manufacturing can achieve 10

its greatest potential in a capitalistic model; however, government must always be theauditor and regulator of capitalistic manufacturing. Capitalism inspires man to work, butit can lead to greed, and that is why regulation is part of the American capitalism. Thebasic concept of capitalism motivates society to produce more. Manufacturing certainlyreached its highest success in the American industrial age, where capitalism, Americanexceptionalism, and democracy ruled. The rise of America over the great British Empire was manufacturing based. Inmany ways, Britain had abdicated its world leadership preferring to become the world’smerchant in the 1860s, when it moved to a free trade policy. Britain realized that to be amerchant, it needed manufacturing, and reset it goal to become a banking and financialcenter. The result was Britain passed as one of the world’s leading manufacturingcountries. America seems determined to take the same path. America has now abdicatedits leadership to Asia preferring to be the world’s marketplace. Free trade has become ourmantra 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 hasbeen accepted as economic dogma. Liberals and misguided conservatives have foundcommon ground in free trade policies.1 Tariffs have been effectively blamed for the GreatDepression. This logic has created a generation that sees free trade as a given. Yet, few ofthese followers had read the behemoth Wealth of Nations. Adam Smith was far from apurist as his followers are today. He made exceptions on free trade for industriesnecessary for a country’s defense or culture. He allowed the British to protect itsshipbuilding and France to protect its wine. A “fair trader” today is considereduneducated and ignorant of enlightened economics. A “protectionist” is a dumb nativistlacking education and blindly patriotic. An economist that suggests any benefits ofprotectionism has the same lunch table as the university creationists. The protectionistand 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. Heargued for free trade based on a provincial model. The Union of Scotland and England in1707 represented the largest free trade zone in Europe, which created an economic boomin Adam Smith’s Glasgow, Scotland. England had successfully moved out of itsprovincial tolls and tax system. The economic success of free trade was based on Britishinternal 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’sview today would be trade between the states of America. Furthermore, does it makesense to put our faith in Adam Smith, who never saw or heard of the IndustrialRevolution? Most if not all tariffs of Adam Smith’s lifetime were on agriculturalproducts. A man from a world dominated by craftsmen and small merchants. A man whoknew 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 wouldhave deemed it as necessary for a nation. Adam Smith was right in seeing all trade aslocal and capitalism as national. Lacking a one world movement and system, there can be1 Free Trade is used to identify a government policy. The term is really duty-free inpractice. 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 aterm. Politicians have beaten back the use of the term fair trade. 11

no other view. The real fact is that both free trade and full protectionism are ideas thatneed open review. Like politics, all trade is local.American Capitalism and a Vision of a Democratic Manufacturing Utopia The father of American manufacturing is none other than FederalistAlexander Hamilton. It is unfortunate that conservatives have embraced the politicalideas of the Federalists, but have totally ignored the economic policies of Federalists.American exceptionalism and sacrifices demands a premium for our labor. Hamilton’sReport on Manufactures should be a guiding document. The following is an importantexcerpt: “But though it were true, that the immediate and certain effect of regulationscontrolling the competition of foreign with domestic fabrics was an increase of price, it isuniversally true, that the contrary is the ultimate effect with every successfulmanufacture. When a domestic manufacture has attained to perfection, and has engagedin the prosecution of it a competent attend the importation of foreign commodities, it canbe 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, whichtakes place, soon does away every thing like monopoly, and by degrees reduces the priceof the article to the minimum of a reasonable profit on the capital employed. This accordswith reason of the thing, and with experience. Whence it follows, that it is in the interestof a community, with a view to eventual and permanent economy, to encourage thegrowth of manufactures, in a national view, a temporary enhancement of price mustalways be well compensated by a permanent reduction of it.”2 Hamilton’s thesis would beproven in the1800s. Tariffs built up domestic manufacture and encouraged technologyinvestment that actually lowered prices long run. In addition, domestic competition wasstrong enough to prevent monopolistic behavior. Hamilton saw capitalism as national inscope. Hamilton’s and Federalist views led directly to the “American System” of HenryClay. American capitalism was directly related to the political foundation ofHenry Clay’s “American System.” Clay’s American System was a protectionist approachto protect American industries via tariffs, and an aggressive approach to nationalimprovements. The Federalists and the Jeffersonians would split on this to form the WhigParty. To fully grasp the roots of Clay’s economic philosophy, one must first understandThomas Jefferson’s vision of the nation. Jefferson envisioned an agrarian society offarmers and merchants. In 1790, an estimated 90% of the American population wasemployed in agriculture. His vision demanded free trade to assure that American cropscould move into foreign markets readily. Jefferson had grown up in a tobacco and cottonculture that depended on European purchases and their crops. While he believed in farmself-sufficiency, he feared the industrialization that he had seen in Europe. Hamilton onthe other hand saw America’s freedom rooted in its ability to achieve economic freedomthrough manufacturing and banking. Hamilton, the soldier, was well aware of the role oftechnology and manufacturing in the ability of a nation to win wars, and believed thatmanufacturing was fundamental to America’s freedom. Hamilton as a young officerfound the colonial army constrained by lack of iron cannon and rifles because of the lackof American manufacture. America’s moved to cheap dumped British iron after theRevolutionary War, only to be caught again short of manufactured arms for the War of2 Alexander Hamilton, Report on Manufactures, January 15, 1790 12

1812. Interestingly, President William McKinley would have the same experience in hisregiment during the Civil War, and it would be President McKinley that was the goldenera for pig iron protectionism. Hamilton, however, remained a opposed to across theboard duties, like many of his federalist friends, believing that financial systems were thebasis for industrialization. Still, at the very root of Hamiltonian Federalism wasgovernment’s role to promote industry. Actually, the Federalists were split on tariffs,some seeing no need for them because America lacked manufacturing, and others seeingtariffs as a source of federal revenue. Hamilton envisioned protectionist tariffs to helpdevelop particular industries. Even today we allow a 50 cents a gallon tariff on Brazilianethanol to promote the domestic development of this industry. Both Jefferson and Hamilton were constrained by the agricultural nature and lackof manufacturing in America at the time, as well as by earlier colonial British constraintson industries such as iron making. These British prohibitions such as the British Iron Actof 1750 had infuriated Scotch-Irish iron makers like James McKinley (WilliamMcKinley’s grandfather) in western Pennsylvania. In particular, the Scotch-Irish movedto the Ohio frontier to avoid tax laws. The Iron Act of 1750 allowed for all raw bars ofsmelted iron known as pig iron to be shipped to England duty-free, but outlawed theproduction of iron products, such as kettles, skillets, stoves, forged iron for guns, andsteel for the blacksmith shop. These frontiersmen remembered and vowed never to beeconomically restrained again by any government. Many of these same Scotch-Irishwould flee western Pennsylvania to Ohio, Kentucky, and Tennessee to avoid the federaltax on whiskey manufacture in 1794, and would become part of the political base offrontier politician Henry Clay. It would be a base that often disagreed with Clay wantingcheap 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 themanufacturing base today they would be appalled. The Federalists believed firmly in thefunction of government to regulate commerce. The Federalists were supporters of tariffsto protect American agriculture, but foresaw a day when a different movement would benecessary to promote manufacturing.3 James Madison also argued the regulation offoreign commerce was a function of the federal government.4 They would quickly seethrough the idea of “free” trade, and realize the nature of the economic warfare we findourselves. They would well remember their dependence on England for iron when theWar of 1812 began. That lesson would help form the Whig party that saw manufacturingas fundamental to national security. The Whig Party saw strong manufacturing as part ofnational defense, and even Adam Smith saw national defense trumping free tradeconcepts. The anti-government Scotch-Irish, who a rebelled against federal taxes,believed that the federal government should promote manufacturing as a national defenseissue. These freedom-loving patriots realized that economic freedom was necessary forpolitical freedom. They have suffered centuries both in Europe and America from Britishcontrol of their manufacturing. Similarly, the American declaration of economic freedompreceded the Declaration of Independence by two years. The Whiskey Rebellion of 1794 more than anything caused a political divide inthe Scotch-Irish along economic lines. The wealthy Scotch-Irish industrialists and the3 Federalist Papers, James Madison No. 414 Federalist Papers, James Madison No. 42 13

Presbyterian Church leaders had supported the Federalist application of the law. Theirpoorer cousins in the Pennsylvanian hills opposed a strong central government and taxeson 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 livedin clapboard houses) put together a strong opposition to the Federalist manufacturers. TheJacksonain Democratic Party (known as the clapboard democracy) controlled the area,but Pittsburgh’s congressmen were protectionists, who sided with Henry Clay inCongress. Clay’s Federalism and strong support of manufacturing turned westernPennsylvania, eastern and southern Ohio, Northern Kentucky, and Maryland into astronghold for “Clay Federalists.” Clay’s system built a manufacturing base in theMidwestern and New England states. Pennsylvanian Henry Baldwin supported HenryClay’s American System with an iron fist. Pennsylvania Senator Judge Wilkins becameknown as the “iron knight” in his support of iron tariffs. The manufacturers ultimatelywrestled the vote away from the democrats as Andrew Jackson’s policies turned anti-manufacturing. These manufacturers often held dinners for national protectionists, suchas Mathew Carey and Henry Clay. Near-by manufacturing cities such as Steubenville,Ohio and Wheeling, Virginia developed a manufacturing network through Clay andCarey. Matthew Carey would become a proponent of managed trade and an advisor to ayoung Abraham Lincoln. Clay and Carey (and Hamilton) would be heroes to futurePresidents Lincoln and McKinley. If President William McKinley’s economic roots can be traced to Henry Clay thenClay’s roots can be traced to Federalist and first Secretary of the Treasury, AlexanderHamilton. And like McKinley, Hamilton learned his economics as an army supplyofficer. Hamilton, while on Washington’s staff, had struggled to get their soldiersclothing because of America’s dependence on British goods. He also learned the hardlesson of inflated dollars as merchants rejected government notes. His experiences wouldbe 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 andMcKinley’s approach to government as it related to national industrial planning, and theimportance of protecting such industries as pig iron. Hamilton was the first to suggest ascientific approach to tariffs versus across the board revenue tariffs. First defense andnational industries were to be protected, followed by targeted infant industries. He arguedfor lower tariffs on raw materials to help industry. This is why you must manage trade forthe good of the country. These early founders invested federal money in the developmentof canals and roads to expand manufacturing. Hamilton would win many disciplesincluding Henry Clay. Henry Clay was a Virginian lawyer who moved to Kentucky to launch a career. In1810, 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 thegood of the nation over his own constituents in Kentucky. His oratory, compromisingskills, and patriotism brought him quickly to the position of Speaker of the House. Claynot only fashioned the position of House Speaker, but he formed the powerful standingcommittees such as the Ways and Means Committee, which would be the pedestal tolaunch the career of William McKinley years later. Clay also created a Committee on5 Ron Chernow, Alexander Hamilton, (New York: Penguin Books, 2005), 374 14

Manufactures to help stimulate American manufacturing as Alexander Hamilton hadsuggested years earlier. Clay appointed members for these powerful committees, and thuscentralized legislative power under the position of Speaker. Clay used the power to createa national infrastructure for an industrial America. Clay’s vision of an industrial empiretook him from Jeffersonian Republicanism to Federalism and then to conservatism andrepublicanism. Some Federalists, however, were New England based free traders. Clay’sarguments and the rise of American manufacturing won over many Federalists whobelieved in the destiny of the American republic as a world power. Clay had grown up inthe economic debates between the Jeffersonians and the Federalists. Amazingly, the early Jeffersonians promoted duty-free trade were possible toassure tobacco and cotton plantations could trade with England. British dumping ofdefense 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 inthe years preceding the war. Political disagreements with England required some strongaction. Jefferson imposed an embargo (the ultimate tariff) on some British goods andlater there was a British embargo. The lack of iron, in particular, caused the start-up ofAmerica’s iron furnaces that had been dormant for decades. Saltpeter and gunpowdermills were re-started. American manufacturing was created as foundries and forgesopened again. A mini economic boom resulted. The result was an industry, while stillweak, could supply the American fight. America would win the war, but Brittan wouldlater turn to economic warfare to break the young American nation. The struggle and the delineation of these competing visions of agriculture andindustry would evolve as the nation evolved. By the dawn of the 1800s, the nation had adeveloping manufacturing sector in New England. America was learning to produceguns, gunpowder, farming implements, and textiles. Even Jefferson marveled at theindustrial growth and its contribution to the nation. Yankees had smuggled in newautomated looms from England and American textile manufacture moved to a new level.The acceptance of automation had given American textile manufacturers an advantageover the labor-intensive British industry. Its own anti-automation proponents known asLuddites had held England back. Furthermore, the War of 1812 had caused a surge inAmerican textile production as part of the need for economic freedom, as well as, a boomin iron manufacture in the middle states. The McKinley family would ultimately purchaseone 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 the1820s, and proved Hamilton’s view of the need for economic independence. The Britishattempted to destroy the American textile industry by dumping huge quantities of Britishtextiles on American docks. The British similarly dumped cheap pig iron to suppress theAmerican pig iron industry. Henry Brougham in Parliament declared, “It was well worthwhile 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 thistype of war bankrupting hundreds of American manufacturers and closing charcoal ironfurnaces throughout the country. Lord Brougham in Parliament of 1816 summarized thestrategy: “ It is well worth while to incur a loss upon first exportation, in order by the glutto stifle in their cradle those rising manufacturers in the United States which the war hasforced into existence contrary to the natural course of things.” The northeast put political 15

pressure on Congress to save its textile-manufacturing base, and the Pennsylvanian,Virginian, and Ohio pig iron producers and users joined the political pressure. Thatpressure 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 cottongrowers opposed any tariffs on British goods, believing Britain would retaliate withtariffs on cotton and tobacco. The major portion of the South’s cotton and tobacco wentto Great Britain for processing. Furthermore, even the northeast representatives were tornbetween the textile manufacturers and the merchants, who favored free trade. Thestruggle in congress in 1816 would produce a new champion in Henry Clay, Speaker ofthe House. The congress appeared hopelessly deadlocked on the issue. Clay built analliance for the tariffs based on nationalism versus regional politics. The debate tookplace 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 foundallies in southerners John Calhoun and President Madison, who would help tip thebalance. Clay brought in the middle state representatives who had suffered from Britishdumping of iron products to suppress American industry. He astutely played on risingnationalism and anti-British sentiments to bring in enough southern votes to pass thetariff. The embryonic Pig Iron Aristocracy rallied behind Henry Clay. The result wasAmerica’s first tariff- the Tariff of 1816, which established duties of 25% on cotton andwool products and 30% on iron products. The Tariff of 1816 would help the financialsecurity of the Pennsylvanian ironworker families, such as that of the future WilliamMcKinley. Clay had by the Tariff of 1816, not only broken from Jefferson’s thinking, but thatof his own Federalist leanings of free trade. The Federalists were split because tariffsappeared to be a heresy. Many Federalists were free-trader Yankees, even thro theyfavored 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. Itwas a Magna Charta of American economic freedom. Clay realized that economic warwas a reality in the world of the 1800s. Clay’s vision was similar to Jefferson’s, differingonly in that industry was substituted for agriculture. Like Eisenhower in the 1950s, Clayenvisioned a system of national transportation to support industrial growth. Clay moldeda powerful new philosophy, which blended Jeffersonian independence with economicmanifest destiny. Clay went further to justify his American System by blending inAmerican moral superiority with nationalistic capitalism. The momentum had turned inClay’s favor by 1824. The struggle, however, would not end as skillful opponents arosesuch 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 anoratory 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 genuine American System. We must naturalize the arts in our country, and we must naturalize them by the only 16

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.6Clay struggled against his oratorical match, Daniel Webster, and the entire southern wingof the House of Representatives. Clay had strong support of the Pig Iron Aristocracy’sHenry Baldwin, the “iron knight,” from Pittsburgh. Daniel Webster of New Hampshireopposed the tariff because it might hurt the New England shipping industry. Claypersisted, and on April 16, 1824, the Tariff of 1824 passed 107 to 102. Since cotton andtobacco caused resistance in South, a break down of the slave versus non-slave states ismore telling. Non-Slave States voted for the tariff 89; against 32. Slave states: for tariff18; against tariff 70. Ohio supported the tariff not only in the Mahoning Valley but alsoin more western counties where an infant wool industry was emerging. Pennsylvania andOhio’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 (thepercentage of value as represented by the invoice). The Tariff included cotton, wool, andiron 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 WhigParty (known as Iron Whigs) and President McKinleys 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 theprotection 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 weremoving toward protectionism versus their initial free trade policy. National roads andcanals 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 thepresidency 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 newpresident John Q. Adams, but political opposition in the south was growing too. Theopposition was gathering behind Andrew Jackson and the Democrats. While the Pig IronAristocracy supported Adams and Clay, Jackson’s popularity triumphed over localinterests on the Allegheny plateau of Pennsylvania and Ohio. In fairness at the timeNorthern state congressmen whether Jacksonians, Jeffersonian, or Federalist supportedtariffs. The rural Scotch-Irish were fierce Jacksonians as a results of Federalists efforts totax whiskey, but the Scotch-Irish were pro-tariff. The Jacksonians were positioning for apresidential run, and found success early by taking control of the Twentieth Congress in1827. The Jacksonians of the Democratic Party had strength in the west and south. Theresult of the popularity of tariffs in the east and middle states and political division led tothe “Tariff of Abominations” as tariffs became a party and political issue. The Democratsactually allowed an unbalanced tariff to be passed by the National Republicans, turningthe measure into future votes for the Democrats and ultimately lower tariffs. The billextended the tariff on certain products from Ohio, Pennsylvania, Kentucky, and New6 Robert Remini, Henry Clay: Statesman of the Union, (New York: W. W. Norton & Co.,1991), 230 17

York by increasing the duties on iron, spirits, hemp, and molasses. The wool products ofNew England, which Clay had initially used to justify the earlier tariffs, were basicallyignored with a modest increase. Clay could only watch as the bill passed, assuring futureJackson votes in the powerful northeast. President Adams signed it because its usefulnessoutweighed future political problems. The Tariff of Abominations would in retrospectgive Jackson and the free trading Democrats the White House, setback the nationalistictariff policy of Clay, and move the nation towards civil war. The Jacksonain movementre-strengthened the Democrats on the Ohio frontier because of the personal popularity ofAndrew Jackson, but ultimately Jackson proved a weak supporter of Americanmanufacturers, 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 industrialvision 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, allowingDemocratic Andrew Jackson to take the White House in 1828. The Jacksonians efforts toreduce tariffs were somewhat muted in Congress by Clay and his followers. Jackson’spopularity won him re-election over a challenge by Henry Clay. Jackson would be Clay’snemesis throughout their careers. Clay might well have won the presidency except for thesplit the Scotch-Irish Jackson caused among the Scotch-Irish. The Tariff of Abominationsin 1828 had caused the legislature of South Carolina to pass a Nullification Act. For thesake of the union, Henry Clay compromised with the Jacksonians to pass a slightlyreduced tariff. The Jackson administration was a constant problem for protectionists suchas 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 withonly 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 bankhad been a key factor in the industrialization of America. The bank had been aHamiltonian approach to assure money and credit were available to industry. Clay heldthe tariffs, but lost the battle for the national bank. Still, the national bank served a veryimportant role in jump-starting American industry. The bank further showed that creditand money help was part of the government’s role. Some might argue that a nationalbank might have a role today. The counter-revolution of Clay and Webster resulted in an alliancebetween labor and capital under protectionism, which would be embodied in theformation of the Whig party and later the Republican Party. Clay believed the laborer tobe part of American capitalism. This fundamental premise of an alliance of labor andcapital, and the strength of that alliance would define the success of the new Whig partyas well as the Republican Party for the next 60 years. To counter the folk hero of AndrewJackson, the Whigs elected their own Scotch-Irish hero, Davy Crockett of Tennessee toCongress. The Whigs would also attract future leaders such as Abe Lincoln, JamesGarfield, 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 helpinfant industries, and the tariffs revenues were used to build roads and canals. In thenortheast, textile mills were growing; in Pennsylvania and Ohio iron furnaces were being 18

built; and the American nation was moving from an underdeveloped country to anindustrialized one in the first decade of the 1800s. The American system ofindustrialization was being held by industrial critics such as Charles Dickens as utopian.The manufacturing methods and automation of American industry was rapidly becomingthe standard of efficiency for the world. Pioneering American industrialists such asFrancis Cabot Lowell started to develop uniquely American textile factories. While stillphysically demanding, the factories were clean and offered schooling and training. Evenold Jeffersonians were proud of the rise of American manufacturing supremacy. Part of the superiority could be found in the American “factory system.” Thetariffs 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 interchangeableparts; it was the first government contract. The Springfield Armory under ColonelRoswell Lee advanced the factory system in the 1820s with the application of laborspecialization and automation. The real progress was not so much in the ability toproduce standardized and large quantities of weapons, but the growth of the new industryof machine making to support such industries. The Tariff of 1824 had built a foundationfor American investment by stabilizing the market for American industrial goods. In the1830s, America was becoming a nation of mechanics as exemplified by the appearance ofmechanics’ institutes, schools, magazines, and newspapers. The Franklin Institute ofPhiladelphia was founded in 1824 to promote the advance of mechanics and science. The protective tariffs caused an industrial boom in New England’s textileindustry. The textile manufacturers were well protected and the textile industry grew, andit birthed the machine industry to support the automation of the textile indsutry. Utilizingthe waterpower of the Connecticut River, the machinery industry grew to support textilemanufacture, arms manufacture, and farming equipment. The growth caused England’sgreatest machinists to immigrate to New England. They came with British machines,which the New England Yankees reverse engineered into better machines. At the 1851Crystal Palace Exhibition, the British were shocked and humbled by the Americanmachine technology. The Connecticut Valley would become a bastion of tariff supportfor Clay and then McKinley. The machine industry opposed the Jacksonians and wouldultimately find a home in the Whig Party and Republican Party. The textile industry andancillary industries had demonstrated that tariffs could create focused growth. The tariff created volume and stabilization in the textile industry ushered in an eraof invention and technology after 1812. An 1837 survey by the state legislature ofPennsylvania 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 miracle attracting the world’s manufacturers, writers, and 19

politicians.7Henry Clay toured the textile industry several times in the 1830s to furthermore promotehis “American System.” One of the mills was named after Henry Clay to honor hisprotective tariffs. Even Clay’s enemy Andrew Jackson honored the textile industry with apersonal 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 hadbecome the banner for free trade. Henry Clay now argued that free trade could reduceprices in the short run but at the expense of capital investment, invention, andautomation. Furthermore, Clay saw capitalism as a national philosophy, not an attributeof free trade. Still, the farming majority saw it much differently, fearing internationalreprisals and higher prices for domestic goods. Henry Clay would bring philosophical support for protectionism. Henry Clay, thelawyer, had actually read Smith’s long and boring narrative. Clay understood theweakness of Scottish Smith’s ideal of free trade. Smith had allowed for a number ofexceptions in his free trade proposals such as defense industries. By doing so, Smithallowed exceptions for some of Britain’s strongest industries. Clay saw industry itself asbasic to America’s defense of its freedom. Clay believed in capitalism at the nationallevel, but felt political factors restricted the type of international capitalism suggested byAdam Smith. Furthermore, Clay was a true conservative, seeing America as havingsupremacy and a God directed destiny. The survival of democracy depended on theproductivity of its laborers. To Clay protectionism was critical to freedom and democracyitself. He further argued that Smith based his thesis on the trade-based economy ofScotland, 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 oversome old Federalists as well as many Jeffersonians.America’s Machine Age The period from 1840 to the Civil War was one of slow growth for the Americanindustry. Whig political pressure kept the tariffs favorable, and abundant resourcesallowed growth. The iron industry, in particular, grew and improved. The ConnecticutValley saw an emergence in the machine tool industry. The Connecticut Valley had along history of manufacturing. Like all immigrants, the Puritans moved west to findprosperity. One of the earliest of these movements was to the Connecticut River Valley in1636. The Connecticut River starts in the mountains of New Hampshire and cuts throughVermont, Massachusetts, and Connecticut into Long Island Sound. In the early 1600ssome Pilgrims and Dutch had a fur trading operation, but not farming. It was anextremely fertile valley, which drew immigrants from New York and Pennsylvania. Moreimportantly, the Connecticut River was a huge energy source. The Connecticut River’sfall over its length is estimated to have had an energy potential greater than that ofNiagara Falls. The river could support power for gristmills and iron furnaces, makingfarming more economically successful. The power of the Connecticut River caused amixing of nationalities, and the emergence of American manufacturing. The Valleywould birth manufacturers, such as Eli Whitney, Samuel Colt, Francis Lowell, CyrusBuckland, Thomas Blanchard, Alexander Holly, and George Westinghouse. The ethnic7 Anthony Wallace, Rockdale, (Lincoln: University of Nebraska Press, 1972), 186 20

mixing retained the Protestant work ethic and economic drive of the Puritans. TheConnecticut Valley would launch the Machine Age in America. The Puritans in Connecticut expanded their crafts and skills. Twenty-six townsrecorded silversmiths before 1776. Silver plate was one means of storing wealth in apragmatic manner, so favored by the Puritans. The demand for silver product createdworld-class silver smiths in New England such as Paul Revere of Boston. The Puritans ofConnecticut really started the metals trades of America. Even with limited efforts toproduce pig iron, the Connecticut colonists developed a secondary metals industryunequaled in the other colonies. Connecticut developed eight rolling mills (two more thanthe total of all the other colonies), which manufactured hoops for barrels, nails, and sheetfor tinplate. The demand for iron bar created a search for bog iron, which was found in1734 in Salisbury Township near the New York border. Initially, these industriouscolonists used crude Catalan furnaces and small forges. By 1740, charcoal furnaces werebeing 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, EthanAllen, future Revolutionary War hero, built his Lakeville Furnace. He added some of thelarge 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 Whigpolices in the 1840s and 1850s. Cheap energy, Whig tariffs, and regional capitalism againbirthed new industries. The machine tool industry took root. Lathes were refined andapplied to new applications. These “valley guys” invested in research and development.They made precision machining a “Holy Grail.” Their fame grew within the field asmachinists emigrated from England to the valley. They stole technology when necessaryand improved on it. At the famous Great Exhibition of 1851 in London, America shockedthe world with its machines and tools. America was now a manufacturing power on equalwith England. Prince Albert was so shocked he formed a committee to detail howAmerica had surged ahead of industrial Britain. The list is informative for today’smanagers. (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 natureInterestingly, today these can be considered our weaknesses. Lincoln exploited these strengths during the Civil War, and Lincoln forceddomestic production were possible. He stirred a competitive spirit in Unionmanufacturers to build bigger and better arms. Great pride would be found in the storiesof casting the world’s largest cannons at Pittsburgh’s foundries. The American spiritimpressed the imagination of French science fiction writer Jules Verne, whose storieshailed American ingenuity. It was competitive spirit that wanted to produce the biggest ofanything. Americans took pride in producing cannon bigger than those of those of theKrupp in Germany. To make things bigger required the development of technology. Thesuccess led to the Republican application of tariffs throughout the end of the 1800s.American competition led to a love to conquer not in war but in the technology of the 21

World Fairs. To Europe it seemed boastful and wasteful. By the Philadelphia Expositionof 1876, America was the world’s technological leader. American heroes were capitalists,inventors, manufacturers, and engineers. Machines were the art of America, andengineers were its artists. America was fulfilling the predictions of technologicalgreatness predicted by Jules Verne. America led the world in engineers, while today werate at the bottom of industrialized nations. Another part of America’s success was the competitive andfundamental approach of American education. Much has been written about WilliamMcGuffey and capitalism because of Henry Ford’s love affair with McGuffey Readers. Itmust not be lost in any discussion that McGuffey was an educator, not a philosopher.McGuffey Readers hailed American exceptionalism. Maybe more revealing was thedescription of the education of Henry Clay Frick, the father of American capitalism.Frick biographer George Harvey described it as: “The curriculum comprised the familiarthree R’s, slightly amplified, the books allotted being McGuffey’s Reader, Pinneo’sgrammar, Mitchell’s geography and Ray’s arithmetic.” Other McGuffey capitalist alumniinclude 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. Moreso than Max Weber’s “Protestant Work Ethic,” McGuffey’s rationalization for classstructure 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. Thefundamental support of capitalism came from McGuffey’s unwavering support forindividual property rights. Likewise, his basic support of capitalistic concepts camebefore Capitalism was defined as an economic approach. He saw the existence of povertyand wealth as both in God’s providence. Neither was intrinsically evil. McGuffeypersonally feared Andrew Jackson in his day as promoting redistribution of wealth.Poverty was to be addressed by the wealthy, not solved by political schemes toredistribute wealth. McGuffey preached competition when socialism preached politicalequality. Lastly, McGuffey believed Americans were special and destined to do greatthings. It is exactly the educational system that is lacking today. It was the opposite oftoday’s world view.The Golden Years of Protectionism The Tariff Bill of 1890 was the career signature of William McKinley, and itwould give him national support and a local defeat. What at first was called his Waterloowould actually forge the sword of victory. The Fifty-first Congress of 1888 formed withwhat was believed to be a mandate for tariff reform. The Republicans controlled theWhite House and both branches of the legislature. Providence seems to favor McKinley,and McKinley’s power was peaking. The tariff issue, now preeminent was whatMcKinley 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 asex-president Hayes. McKinley’s showed true brilliance in his compromises andteamwork, not only in the House, but also with the Senate and White House. He wasdealing with a mix in both parties. The tariff bill included many innovations, whichhelped American farmers and manufacturers. It was an extremely well prepared by onindustry and product statistics. The bill completed the evolutionary steps of American 22

tariffs from revenue generating to protective to industry development. No bill before hadbeen directed at policy to build industries such as tinplate and sugar. Yes, there would bea small increase initially in prices, but prices would actually decrease long term asindustry invested in research and development because of stable prices. This was apleasant surprise that long-term market stability actually improved investment. Think oftoday as the swings in energy prices discourage long-term investment. McKinley’s Bill of 1890 was the best researched ever, and usedscience and statistics to apply the tariff rates. First McKinley argued that the revenuetariff 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 1824the proportion of free imports was less than 6 percent; in 1830, about 7 percent…. Thepercent of free imports from 1873 to 1883 was about 30 percent, and under the tariffrevision of 1883 it averaged 33 percent.”8 For his 1890 bill it would be 50%. Thedifference was that it focused on the nation’s needs, not revenue producing, which foryears had been the only major source of government income. The plan was fullyconsistent with the Federalists view of a manufacturing utopia. The McKinley plan was aresult of years of study, and none knew more about tariffs than McKinley, but he wouldhave to make political compromises to get it passed. McKinley poured nightly over thetariff schedules, and surveyed his colleagues on industry needs. McKinley argued that protective tariffs had not restrictedexports, and again the numbers supported him: “We sell to Europe $449,000,000 worthof 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 theprotective tariffs of America: “ Because it is my deliberate judgment that the prosperityof America is mainly due to its system of protective laws.” The McKinley tariffs werefocused on building America, not restricting trade. They were applied in a manner thatdid 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 theUnited 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 ofour own.” McKinley extensive study had truly brought scientific management into tariffrates, but Congress prefers politics to science. A tariff commission was also establishedto monitor the impact of the tariffs. This regulatory committee helped the oppositionassure fairness and companies invested in jobs, not filling their pockets.Free Trade America has developed the British idealism of free trade of 20th century Britain. A8 William McKinley, “ The Value of Protection,” The North American Review, June1890, Volume 150, Issue 403, pages 747-48 23

path that took an Empire to a small world state. At best, American politicians do notunderstand 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 democracyinstead of convincing them with success. It is more than just jobs (as though that weren’tenough), 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 beovercome 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 manufacturedhere. The very fuel for these military vehicles is mainly from other countries. America’sdownfall will not come from a nuclear warhead or a successful military invasion, but inits inability to defend itself. We are already in a position where small countries cangenerate 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 assumesnational self-sacrifice for the greater world, which is a myth. The type of free trade wehave today is world socialism with the goal of redistributing the wealth of nations (notredistributing the wealth to the poor of the world). Governments still for the most part actin 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 willingto cross the aisle. The President watched powerlessly as national unemployment spiraledup, and money to buy houses disappeared. The farm representatives of Iowa and otherfarm states, and the opposition industrial states had battled to a standoff. One Midwestcongressman rose to share his unbiased observations of the industrial belt and forge analliance: 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.9This was not spoken today but in 1820 by Henry Clay! America was in its firstdepression after its first great industrial expansion. She was still celebrating her secondvictory over the world’s greatest military in the War of 1812. America had opened herports to all goods duty free, and an aggressive British empire saw the opportunity to winthe economic war. The crisis would result in the “American System” and lead to herbecoming the world’s manufacturing center forty years later. This worldwide crisisconsisted not only of economic factors but a fuel shortage in Britain. In the 1860s, Britain fully embraced the theories of free trade, and within threedecades lost it manufacturing lead with the rapid decline of iron, steel, coal, andmachinery industries. At about the same time, America implemented managed trade withprotection to specific high employment and infant industries, and it was America thatreplaced Britain in industrial leadership. The protectionist tariffs of America from 18609 Thomas Cochran and William Miller, The Age of Enterprise, (New York: Harper &Row, 1942), 12 24

were really “golden” tariffs leading to America’s greatest industrial period ever. Pricesactually went down as industry stability created long term investment in technology. Thebetter term here is managed trade policies, which were protectionist, but avoided tradewars, and demanded economic reciprocity (not political). During the great Republicantariffs, America investments revolutionized glass, steel, communications, and oilindustries. Against the common wisdom that big business would pocket the profits fromtariffs, business saw stability of protection as an incentive for long-term capitalinvestment. Wages increased during the period as well as Americans were protectedagainst cheap labor. Vertical integration mushroomed as protected raw material pricesforced industries to look for American raw materials. America was fully employed andshipping its manufacturing surplus overseas. Protected industries actually reducedmanufacturing costs and were competitive with the world. With tariffs as thegovernment’s major income (there were no income taxes) there was a surplus, and themain problem was how to spend it! This golden period (1890 to 1907) has beenovershadowed by the later corruption and progressive shadow of Teddy Roosevelt. Statistics for the 1890 to 1900 decade support the conclusion that prices camedown, profits rose, capital investment went up, and wages held or slightly increased (realwages 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 inmanufacturing remained around 10 hours a day. Heavily protected industries such as steelfared slightly better with wages. The cost of living index fell during the decade from 91to 84 or about 8%. The clothing cost of living dropped even more from 134 to 108 or19%. 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 dayto $1.77 a day in 1900 or about a 12% increase.10 The success of this period of managedtrade depended on government oversight, business cooperation, and labor support. Maybejust 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. TheMcKinley success depended on American capitalists re-investing in American plants.Early on in the 1882, Congressman and Chair of Ways and Means, William McKinleyformed an overview board in congress to accesses the ongoing impact of the tariffs. Thisoverseeing and regulation was the final piece of the puzzle, preventing the abuses manyfeared. Managed trade, however, contradicted Adam Smith. University economists andpoliticians 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 readingit. The 1776 world reflected in Wealth of Nations has remained a model for today’sworld. It is used to justify the call of free trade. In 1776 the British world was yet to enterthe industrial revolution. The world was dependent on the trade of agricultural products.10 Albert Rees, Real Wages in Manufacturing 1890-1914, (Princeton: PrincetonUniversity Press, 1961) 25

Spices, tobacco, and precious metals were the major oceanic trade. Britain’s smallmanufacturing base had no competition. Adam Smith was a true genius in understandingthe aggregate operation of world economics in a pre-industrial world. Adam Smithclearly defined the assumptions and restrictions of free trade in that 1776 world. In manycases, in unusual ways, he even foresaw the problems in a modern world. Adam Smithforesaw how factors could act as a restraint to free trade. The problem is not so much inthe application of Adam Smith’s principles, but in the correct application of AdamSmith’s principles. Adam Smith’s free trade exceptions are often overlooked. First was the exclusionfor defense, which is a large hole in itself. Second is a lesser discussed exception: “Thesecond case, in which it will generally be advantageous in lay some burden upon foreignfor the encouragement of domestic industry, is, when some tax is imposed at home uponthe produce of the latter. In this case it seems reasonable that an equal tax should beimposed upon the like produce of the former.”11 This is the essence of the fair tradeargument. 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 thatthese are monetary charges on our products. Tariffs should be set to reflect the homesocial tax we impose on our products. This is at the heart of why world trade is not free orfair. 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 ofAmericans. 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] inwhich it will generally be advantageous to lay some burden upon foreign, for theencouragement of domestic industry; so there are two others in which it may sometimesbe a matter of deliberation.”12 The first of these cases was economic tariffs in cases likedumping. The second would be the case of slow implementation of free trade. AdamSmith 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 byslow 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’sAmerican 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-intellectualposition in a complex world. McKinley saw protectionism or managed trade as anextension of the Federalist view of government’s role to expand commerce.Protectionism was a conservative principle until the 1960s, and now it is a concept lost toboth parties. Economic reciprocity has lost to political reciprocity in trade arrangements.11 Adam Smith, Wealth of Nations, (New York: Prometheus Books, 1991), p. 361,[ chapter of restraints of certain imports]12 Smith, p. 363 26

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 Americanexceptionalism, which passed away in the 1970s. Today the heart geographically ofMcKinley’s political strength is called the “Rust Bowl.” The once great factories of theindustrial heartland have broken windows as Henry Clay had predicted in 1814. The greatbronze busts of the pantheon at the McKinley Niles Memorial are no longer recognizableto young visitors. But if there is to be a renaissance of American Manufacturing it will befound in the McKinley pantheon in Niles, Ohio. It is here that some Joan or John of Arcwill rise from America’s rust belt. McKinley had learned what Henry Clay had known before him. Protectionismwhile good for the nation’s overall manufacturing was many times industry specific andregional specific. As with Clay voting to protect American industry often had localbacklash. Protectionism, like its antithesis free trade, works as a ecomonic policy, not as aset of economic principles to be applied. Political compromise and trade-off wouldalways be required. Even Adam Smith made exceptions for British shipbuilding in orderto pacify critics. McKinley would learn to compromise in the future suggestingreciprocity with certain nations and products. Furthermore, McKinley believed withHenry Clay that Congress’s function was to review and monitor manufacturing tariffs.This is the cornerstone of managed trade-reciprocity and review. Both Clay andMcKinley developed a congressional committee to oversee the tariffs. Still, in the endCongress preferred debate to the work of monitoring. It is this approach that can lead totrue free trade. Even today economists still point spuriously to the tinplate industry of the 1890sas a failure of protectionism.13 Tinplate, however, is a biased example. In 1890 tinplatewas made from mostly imported rolled high quality iron. The tin-platters coated therolled iron plate with tin through a rolling or coating process. Most of the tin came fromWales, which drove domestic platters costs higher. Two-thirds of their costs were inrolled iron as a raw material, which came mostly from England, thus a tariff on importedrolled iron products drove tinplate prices high as well. The Welsh producers had aninherent 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 McKinleytariffs did increase the price of tinplate, but the high price spurred exploration for tin andincreased technology investment in tinplate and canning. The tinplate industry itself,however, became a major employer in the United States, and prices dropped as theindustry matured. Welsh tin-platers immigrated to the United States to set up shop,further building the domestic American tinplate industry. The Welsh brought their “secretpowders,” but Americans learned fast, and in the end the McKinley Tariff broke a worldmonopoly 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 tinplateindustry 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 nodomestic production, which allowed importers to charge whatever. At the same timecheap tinplate and tinplate products were imported cheaply, which suppressed thedevelopment of a domestic industry. Many feared that England would increase the price13 D. A. Irwin, “Great Tariff Debate of 1888,” Journal of Economic History, March, 1998 27

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 in1892. The mills “found” the technology that free traders said America lacked. Fifteenmonths after the passage of the Tariff of 1890, McKinley toured a new state-of-the-arttinplate mill built in Ellwood, Indiana. Tinplate is actually the example of what is neededin a managed approach to trade. The price of tinplate dropped dramatically by 1895 as the McKinley tariffscreated a very competitive iron industry and technology improved through putting profitsback into the business. As the price increased, American investors poured into thetinplate and canning industry. McKinley, as a Union Army quartermaster, knew well theshortage of canned food to supply the army. The tariffs not only brought investors intotinplate, but into the biggest use of tinplate -canning. During the Civil War a tinsmithcould make sixty cans a day; by 1880 a two-man machine could produce fifteen hundredin one day. In general, the period from 1880 to 1910 saw one of the greatest growth ratesfor 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 exampleof the successful impact of managed trade. Protectionism or managed trade during thelast half of the 19th created a surprising result in the advance of American technologythrough investment in research and development. The period represented one of greatperiods 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 relativelysure of the future product price. If you take the last half of the 20th century, mostmanufacturers were facing a downward spiral in prices as cheap imports flooded themarket. It made it difficult to invest in research and developments, realizing the marketmay well disappear. Of course, some would argue that research and development isneeded in such a market. The facts, however, suggest that research and development iscut in a declining market and price trend. Investment dollars in such a market tend to befocused on cost cutting and operating improvements. William McKinley’s managed tradeseemed to offer a wide range of advantages to manufacturing. Coming from an iron manufacturing family in Niles, Ohio and representing anindustrial congressional district centered on Canton, Ohio, McKinley was protectionist ina much different light than most people today. Protectionism was needed in his view, forAmerican capitalism to flourish in a world dominated by international monopolies. In1882 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.”McKinley’s full implementation of managed trade in the 1890s certainly statisticallydemonstrated the power of managed trade versus unmanaged tariff free trade. Today ourindustries struggle against huge foreign monopolies. Our government strips any 28

monopolistic growth internally, leaving our manufacturers at a further disadvantage in theworld market. The success of the McKinley tariffs, however, must be considered a result of afaith in American exceptionalism. The latter half of the 19th century was the best ofAmerica’s belief and commitment in it. American exceptionalism and nationalism keptcapital and investment in America. It was a patriotic alliance between Americanindustrialists and the American government. Today we lack both that alliance and a beliefin American exceptionalism. America and particularly our government must choosewhether our mission is one world globalization or American exceptionalism. It’s our lackof vision for American manufacturing that is the deeper problem. We sacrifice ourmanufacturing to help spread “capitalism” and democracy, but we are best when we arethe light on the hill. We offer nothing as a mere state of the world. Even if mere worldstatehood is to be our goal, it is not our governments or that of economists’ decision tomake, but that of the people. After labor, energy is the core of manufacturing. Energy even more so than laborhas been the limiting factor of manufacturing. Energy has historically limitedmanufacturing growth as in Germany and Japan. And certainly, cheap energy hashistorically been the root of American manufacturing success more so than cheap labor.Labor and energy are the core of manufacturing. Success has in manufacturing beenlimited even more by energy than labor. When nations have been short on energy, theyhave been extremely limited in their ability to manufacture. Historically, America’smanufacturing success has been more related to cheap energy than cheap labor. If wechoose to limit our energy resources, we will be unable to compete in manufacturing orwe will be unable to sustain our higher wages for labor. Low energy resources havehistorically been more limiting than any other resources. Cheap energy in the UnitedStates has historically offset our higher labor costs even in the 19th century. The idea thatcheap 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, andrestricting 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 coalreserves, and expand wind and solar power. We cannot focus narrowly on only one ortwo, we need to have abundant and cheap energy to run our factories and employ ourcitizens. Managing trade and increasing energy is the only way to sustain themanufacturing 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 inwith the bailout. Conservatives and even liberals cried let the market decide. Bailouts andgovernment loans were socialism or at the very least anti-capitalism. Many quote theFederalist papers against government intervention. As with Adam Smith’s thesis, thefather of the Federalists, Alexander Hamilton is misquoted, misunderstood, and mostoften misrepresented. Alexander Hamilton was the antithesis of Adam Smith. Smithdidn’t see or consider manufacturing in his views of free trade development and 29

reduction of government intervention. Smith’s world was agrarian and governmentintervention met tariffs on crops. Hamilton’s world was manufacturing andmanufacturing had much greater capital needs. Alexander Hamilton would havesupported any government effort to increase manufacturing. Hamilton’s view ofgovernment was as a facilitator, not as a supervisor. Government was to oil the gears ofcapitalism. He considered the promotion of manufacturing as a function of government.Hamilton took the time to study the importance of manufacturing concluding themanufacturing not agriculture was the soul of the nation. Hamilton specially suggested:“protective tariffs or prohibiting the exportation of competing manufactures untilAmerican producers in a given industry were firmly established; prohibiting theexportation of raw materials; granting bounties and other direct subsides; awardingpremiums or prizes ‘to reward some particular excellence or superiority, someextraordinary exertion or skill’; exempting imported raw materials from duties andgranting drawbacks of such duties; encouraging invention; inspecting manufacturedproducts; and facilitating internal commerce through an extension of the bankingsystem and improvement of transportation facilities.”14 This could be a single plan todayfor American manufacturing re-birth! Furthermore, Alexander Hamilton’s proposal of a Bank of the United States was apure injection of capital into the manufacturing and commercial system. The nationalbank would be owned by the government and would make direct loans to manufacturersand 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 areassuch as Pittsburgh. While the bank had a twenty-year charter, it was renewed butultimately destroyed by President Andrew Jackson. Today’s government bridge loans andeven money for industry upgrades is clearly Hamiltonian and Federalist. Under theFederalist 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 didnot take an equity or management role. Hamilton saw the promotion of industry andinvention as fundamental to America’s long-term future. Conservatives have in particularlost their roots. They have allowed liberal thinkers to provide money to industry, but withstrings of management intervention, equity ownership, and product selection. It is thedifference 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 thegovernment, and that is the line where government loans move toward socialism. Hamilton went further in his view that only money applied to manufacturing andagricultural is productive versus paying down debt or buying foreign goods. Hamiltonargues: “useful employment [of money] be not found for the money of foreigners broughtto the country to be invested in purchases of public debt, it will quickly be re-exported todefray the expense of an extraordinary consumption of foreign luxuries . . . usefulemployment too ought to be of a nature to produce solid and permanent improvements. Ifthe money merely serves to give a temporary spring to foreign commerce [which most ofour recent tax cuts and bank bailouts have gone to] as it cannot procure new and lastingoutlets 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 in14 Forrest McDonald, Alexander Hamilton, New York: W.W. Norton, 1982), p. 236 30

similar improvements, it will be productive of substantial utility.”15 Government“intervention” was conceived by the Federalists before Karl Marx was born. Hamiltonwould have clearly supported tariffs on Chinese products, and the government injectionof money into American industry as well as the banking system. In the 2008 Congressional hearings on the auto bridge loans, the UAW Presidentthrew an important Hamiltonian pushback pitch to the Senators. He clearly stated the autoindustry problems were not their own, but government. He stated the total lack of tradereciprocity, 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 baddecisions. The fact is that government trade policy and environmental standards was theelephant in the hearing room that no one seemed to see. Senators cried about the lack ofproducing alternative energy cars that the market did not want. They blamed the autoindustry for not adapting to the high price of oil, which the government created withlimitations of nuclear plant building, oil drilling, and coal usage. America is the world’sgreatest 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 ofgovernment versus the free market world. Usable energy sources are not determined inAmerica by cost or availability but my law. If the government is going to determine whatenergy is used than it should have a plan to re-tool the industry to function in anartificially created world. Finally the world of Hamilton (as well as McKinley) was just as foreign to ustoday 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. Theseare tools that Hamilton (or even McKinley) would have embraced to promote Americanmanufacturing. There are other economic complications in currency value. The Myths of Managed TradeMyth: Free Trade is the Economic Ideal This is the basis of the World Trade Organization. The Ten Commandments areideal 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 TenCommandments would be silly, yet the World Trade Organization is trying to do thesame thing with free trade. The problem with free trade is that it is duty-free trade that isneither free nor fair. True free trade among nations would require a standard worldcurrency, equality of world wages, and equivalent sharing resources. Political, military,and economic competition would have to be nonexistent, and on the level of those15 Alexander Hamilton, Report on Manufactures, January 15, 1790 31

between Michigan and Ohio. The teaching of managed trade or anything but free trade iseffectively banned at universities in business schools. Business students believe free tradeis inherent to business operations, and a necessary requirement for capitalism. The closestthing we have to free trade is trade between the 50 states of the United States. The biggestproblem is our universities where free trade and capitalism are taught as one in the samething.Myth: “Free Trade Capitalism” or Free Trade is the basis of capitalism Free traders always make the linkage with capitalism. Reporters say “Free TradeCapitalism” as if it is one word. This is the premise used to put free trade in theconservative political column. The fact is that the capitalism of the United States, Britain,and Germany achieved the greatest heights under protectionist policies. Capitalism notonly assumes that companies compete but so do nations. China’s trade policy isnationalistic, managed, and capitalistic; it mimics that of America’s goldenmanufacturing period of Republican tariffs. Globalization has moved capitalism to a newlevel, that of nations. China and India, as did twentieth century America, use managedtrade to achieve prosperity and growth. The real capitalistic spirit can be found in Chinatoday. 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 someconservatives have elevated free trade to that of taxes. A well-managed socialisticcountry, such as China, will defeat America economically under our own banner of freetrade. America is already weak in manufacturing areas such as vehicles, steel, oil,castings, forgings, energy, and mining. Economic blockages such as oil could cripple uson the battlefield.Myth: Protectionism caused the Great Depression This is probably the myth loved most by free traders because it evokes fear. Firstone needs to realize that America had been strongly protectionist since the presidency ofAbraham Lincoln. The highest tariffs came with the McKinley Tariff of the 1890s, whichushered in a period of world supremacy of American manufacturing. The infamousSmoot-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 itwas just one of many errors (there was a tax increase as well). The Smoot-Hawley Tariffwas not a managed trade tariff but all out across the board protectionism. The great tariffsof the 1800s were managed by congress according to economic needs and goals. Tariffswere much like other economic tools of today such as taxes, government spending, andthe money supply. All trade tools need to be surgically used and monitored. Americaneeds a manufacturing policy that can use all tools to achieve national goals. The loss ofmanufacturing by any means is the primary root of economic depressions- simplistic buttrue.Myth: Adam Smith suggested complete free trade among nations True but he also used hundreds of pages to note the importance of currency 32

balance. He was just as much against government interference at any level. Holding acurrency artificially low to sell more products is government inference on the same levelas tariffs. Government aid in socialistic countries to help high employment industries ison 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 theforeseeable 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 outof the conservative column. The balance of trade is economic war and defense is a validrole for government. Free trade is an illusion, trade is an economic weapon. When youhave a country that has set world economic leadership by any means, governmentprotection is needed. There is always a danger in putting government in charge ofanything but defense and trade are necessities. Government will draw in politics, but thatis the heart of democracy. Government has always had the role in a democracy to protectthe 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 correctlydon’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 McKinleyhad in a full time commission. Greed has to be addressed, and there are times that foreigncompetition might help. Political systems promote self-interest also. The only role of theAmerican government in international trade and politics is to represent the rights andwishes of the American people. Government has no right to trade American jobs forpolitical concessions or ideologies. America is to be the beacon of democracy, not themerchant of democracy.Myth: Loans to companies like auto manufacturing are socialism Promoting manufacture is a duty of a capitalistic nation. Alexander Hamiltonmade that clear in his 1790 report to congress. Compared to loans and bailouts made tofinancial institutions, loans to manufacture have produced jobs and money for theAmerican people. Of all the ways government can spend money promotingmanufacturing returns it to the people through jobs and standard of living. Capitalismlacks a soul without manufacturing. Capitalism cannot be sustained by retailing alone.Even trade requires manufacturing. Furthermore, manufacturing is the gateway to themiddle class. Without manufacturing jobs a nation cannot sustain growth. Manufacturing,democracy, and capitalism are the troika of horses for economic growth. They areinterrelated and interdependent, neither function well alone. Where loans and bailoutsmove us toward socialism is when government becomes involved in the management ofthe company or market. Loans not equity positions in manufacturing. Using taxes tochange the nature of manufactured products is socialism. Hamilton called on governmentto promote manufacture, not become involved in it. 33

Myth: Tariffs will Increase Prices It is not necessarily true and clearly wrong in the long run. Lack of competitionwill increase prices. During the great McKinley tariffs of 1890 to 1920, prices whendown as American competition increased and stabilized markets encouraged long terminvestment in technology and new equipment. This was exactly what AlexanderHamilton predicted in 1794. Cheap prices mean little to the unemployed worker.Hamilton made this point that targeted tariffs can actually reduce prices, and theRepublican 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, assumesequality in the world. The world is far from equal. America is exceptional in individualfreedom and that allows enormous financial opportunity. I know that this approach is notpopular today and even borders on the dangerous edge for many. Americans are better inthe giving freedom, and they should be rewarded for their sacrifices and efforts to lift upmankind. Freedom comes at a price and cost. The sacrifices of American labor demands awage premium. Trading with economic slave nations is neither free trade nor the way tospread democracy. Entry into our markets must recognize the sacrifices of our workersfor freedom. American capitalism should lead the world for it allows man to achieve hisdreams. 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 theselaborers have the freedom and protection of American laborers. The tariff and its possibleincrease 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 tariffsare not better than free trade. Neither represents free trade. In a world of differentgovernments, cultures, belief systems, currencies, polices, and needs can trade really befree? This is the very heart of the issue. Everybody wants free trade on what they need topurchase, but wants their job protected. Trade is on the level of defense, in fact, they areinterrelated 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 toPresident George Washington was the basis of American nation. Hamilton set a vision ofa manufacturing utopia and molded government policy to achieve it. The un-coordinated,almost haphazard, approach of the government today has created confusion.Manufacturing is rapidly disappearing, and government sees it as free market. China, likeJapan, before it was set a policy to be the world’s workshop, while the United States seesitself as spreading economic freedom, as it props up countries determined to see our end. 34

China violates intellectual rights to take away the American creative advantage, but thegovernment does nothing. Something is seriously wrong and its not the American workeror 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 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 35

for health insurance and retirement, since international companies are not burdenedby these costs. Our policy today is to burden our companies while encouraginginternational companies to compete unfairly. Government has imposed taxes on industry, decides what energy it canuse, 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 industryafter industry. Government needs to regulate against abuses, but it needs to get out ofthe business of business. What the government lacks is leadership and direction. If thegovernment wants to pursuit its insane policy of free trade than it needs to pick up thecost of health care and pensions to put American industry on equal footing. If coal isa dirty fuel than government should be giving research funds to make it clean, and thesame goes for the problems of nuclear. The government seems only to know how toban versus improve. Its lacks a direction that countries like China and Japan have. The government today has a number of tools that Hamilton, Clay, andMcKinley lacked. Besides tariffs, the government has the ability to use tax incentiveto change the habits of the customers, and encourage manufacturing investment. Wecan use incentive to advance technology, as in the case of electric cars. Incentives ontaxes 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 toadvance technology. The government needs to realize that their money is from theworkers of America, and its first priority should be American jobs. Finally, tariffs can work without the extreme result of trade wars. It requiresthe type of managerial oversight found in the McKinley approach. It might evenrequire a cabinet level position to balance manufacturing and tariffs. One of our lastremaining assets is the size of the American market; no one really wants to risk a lostof the American market. It is possible to protect industries such as automotive andsteel at levels that still allow plenty of trade.3. A National Manufacturing Policy To develop a national manufacturing policy, one must look to Bismarck’snational socialism, McKinley’s “dinner pail industrialism,” Roosevelt’s New Deal,and 18th century Britain. Nationalism has been part of economic success because itrealizes that trade is interaction between nations, not intra action. A trade betweentwo nations is a complex exchange of value. The exchange is more than monetary it isan exchange of political capital. Trade is not only influenced by the currencyexchange rate, but it in turn can affect the exchange rate itself. Trade can impact inmany ways the very ability of a nation to defend itself. Alexander Hamilton firstrealized 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 manufacturingin nation building. America in affect had a Secretary of Manufacturing with men likeAlexander Hamilton, Henry Clay, and William McKinley. Today we lack leadershipand policy. We also lack manufacturing champions. We need to once again risemanufacturing to a cabinet level position. 36

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 marketcapitalism” and the economic principles of free trade. It started after the GreatDepression in economics, which is often in a school of liberal arts. Free trade isconsidered a scared principle in economics. Trade is also considered a means forsocial world change. Liberals consider protectionism a tool of world capitalists tooppress poor nations. Conservatives see free trade as necessary for capitalism. It isone 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 itsdominance in the educational system. Socially, the protectionist is perceived as a red-neck, flag waving, uneducated, NASCAR hillbilly. Historically, protectionism ormanaged trade is a conservative value, but the educational system has negated itsvalue. Just as devastating to American manufacturing is the one world thinking of oureducators. A manufacturing renaissance will require a revolution in thought. And thatrevolution requires a major crisis to change thinking, or a slower revolution ineducational circles. Free trade is so ingrained in our thinking it may require a crisis toforce a new look. The problem with managed trade is that intellectuals often defeat itbecause the population does not see a connection to their personal life. Autoworkersand steelworkers understand the results of “free trade,” but their problems arepictured as unique as our economy shifts to a “global” economy. They are portrayedas horseshoeing blacksmiths in a world of cars. Ignorance hides the truth. Many yearsago I was in the Jaycees, doing works for the community with other aspiringprofessionals in the Pittsburgh area. Most of my follow Jaycees were doctors,lawyers, and dentists, and my position as an operations manager in the steel industrywas 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 Pittsburghsuburb not far from the massive steel mill of Aliquippa, but I often felt in a differentworld. One of the members, who was an eye doctor was opening his first office. Theopening was a champagne and shrimp affair. The news of the time was the closing of steel mills on the other side ofPittsburgh. The eye doctor was quick to tell me during cocktails how those overpaidsteelworkers were their own worst enemies. I talked of American cars and he pointedto the high quality of his two German cars. He was amazingly ardent, predicting thatif American products could not compete than those industries must disappear. A fewyears later the great 9-mile long steel mill at Aliquippa closed. Sixteen months laterthe doctor learned some market place economics not taught in schools. His customerbase collapsed! Those overpaid steelworkers had eye insurance for the whole family.They could get a new set of eyeglasses every year and examinations every sixmonths. With thousands out of work the hardest hit were not only retailers, but alsodoctors and dentists. This particular eye doctor ended up in bankruptcy court. Today,as struggling companies no longer offer health insurance, many are feeling the truecost of health. Community public schools are feeling the budget cuts of a declining 37

tax base. There are social costs too such as the increase in crime rate. Even SiliconValley once said to be a free market replacement of our great heavy industries hasmoved on to Asia. We move on believing this type of economic change is natural andnecessary as industries and plants fall one at a time, while China and other countriesrise unencumbered by free trade economics. We are told we are an “informationalsociety,” while we watch others collect, manipulate, and apply information tomanufacturing.5. A focus on science and engineering America has fallen seriously behind in science and engineering. We now importour engineers and scientists. Our educational system lacks teachers in science andeducation. 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 1940sand 1950s birthed a generation of American scientists and engineers that changed theworld. It was a world driven by manufacturing, and manufacturing created the capitalfor 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 theeconomic fact that without manufacturing there is a reduced need for engineering andscience. Government is unlikely to solve the problems without high paying jobs forscientists. These same free market economists don’t see the connection betweenmanufacturing and science. Even Green advocates fail to realize that industry offersthe best source of capital and science resources to solve the environmental problems. When industry is supplying high paying engineering and science jobs, parentsget 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 societiesneed to push grade school programs to develop scientists and engineers. But whywould anyone invest in an engineering degree or physical science degree if highpaying jobs were not available. We cannot push engineers and scientists through thesystem; we must pull them through with economic incentives. Like everything itprobably all gets back to our lack of an industrial policy as a nation. It needs to pullengineering students through the system, not push them. The space program inspiredgenerations of engineers and scientists, but we have lost that. Politicians have missedout in setting a national goal of alternative fuel cars, which could build the motivationwe have lost as a nation.6. American Exceptionalism Believe it not because of being American, but because Providence hasgiven us the opportunity to be the light and the beacon of freedom. Exceptionalism isnot greed or even nationalism, but a hope and belief that free men can achieveanything. Believe because it has been passed down to us, but most importantlybelieve for our future. A nation without a dream can never lead, and has no destiny.American exceptionalism places ecomonic value and rewards on freedom. Freedomcomes at a cost and the cost should be reflected in our products as well as our blood. 38

Dabit dues his quoque finem 39

A Manufacturing Manfesto

by skrabec on Jun 15, 2011

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A Manufacturing Manfesto Document Transcript