By Nancy Spannaus

Feb. 19, 2022—The current stunning rates of inflation in life’s basic necessities – from food to housing to fuel – are understandably becoming the central concern of the proverbial “average American.” So far, however, there is an equally stunning dearth of competent ideas for bringing it under control. What’s missing is an approach based on the principles of the American System of Economics, the principles which worked to build a healthy economy in the past.

American System Principles to Tackle Inflation
An apt cartoon of today’s food price inflation.

Those principles are not obscure. We can find them in both the theoretical and practical work of Alexander Hamilton, Abraham Lincoln, and Franklin D. Roosevelt. They include 1) uncompromising opposition to financial speculation; 2) regulation in the interest of the general welfare; and 3) provision of federally supported low-interest credit for investment in the nation’s essential physical productive capacity and infrastructure.

All of these principles have been violated in the extreme for decades; we are facing a problem exacerbated by the pandemic but brewing for many years. As a result of Federal policy changes, any link between credit issuance and real physical production has virtually disappeared. It will take a radical shift to restore that link, but one that has been carried out before.

A Short Overview

Before addressing the specifics, we should turn our attention to the broad conceptual foundation for the American System approach, Hamilton’s 1791 Report on Manufactures. As I discussed in my March 2020 post on the U.S.’s lack of preparedness to face the pandemic, this is the starting point for analyzing where we’ve gone wrong and what we have to do.

In that report, Hamilton asserts that every nation must provide for the essentials for its population – “subsistence, habitation, clothing, and defence.” Without ensuring a credit system and public policy that provides those goods, a government fails in its duties. Can we be surprised about the outbreak of a crisis, then, when we have outsourced the bulk of our clothing and shoe production, huge sections of our electronics industry, the bulk of our furniture production, and many other vital industrial products? We have even abandoned self-sufficiency in food stuffs, preferring to import products from halfway across the globe rather than rely on our own agricultural sector.

That outsourcing, which led to the decline in U.S. manufacturing jobs by approximately 37% between 1993 and 2011, in fact leaves the United States defenseless, not just against any putative enemy, but against disease, natural disasters, and financial crises. It also sacrifices the living standards, and often the very lives, of our population by depriving them of decent-paying jobs. And now, added to that toll, comes the curse of rampant inflation.

Curbing Financial Speculation

One major feeder of today’s current inflationary spike can be laid at the door of out-of-control financial speculation. Investment in the physical improvement of cities, transport, energy, and other modern necessities has taken a back seat as Wall Street financiers make trillions betting on the movement of interest rates, discrepancies between currencies, and other financial ephemera.[1] Money chases money, pushing prices and profits up ever higher.  For those in the financial investment world, that is.

Asset inflation (as in the bloated stock market) far preceded the price inflation that is now hitting the real economy. The real-world consequences are what we see in the rise of housing prices, for example, a primary element of the current inflationary spike. Prices for even modest accommodations have gone through the roof in metropolitan areas throughout the country,[2] with no relationship at all to the condition or livability of the housing. Prices for land have gone up correspondingly, adding to the costs of building new housing and ensuring it will also be priced way beyond a reasonable level.

Federal Reserve headquarters in Washington, D.C. (wikimedia commons)

The Federal government has played a significant role in creating this crisis in several ways. One of the most notable was the 2009 bailout package, in which the Federal Reserve moved to backstop the inflated mortgage market by purchasing mortgage-backed securities.  If you think this is ancient history, think again!  The Fed still has over 8 trillion dollars of those securities[3] on its books, for which it has poured cheap money into the companies and banks that owned them, money they have generally used to speculate once again.

Then there have been the moves to eliminate long-standing constraints on speculation. For example, did you realize that before the Commodity Futures Modernization Act of 2000, financial derivatives trading was largely illegal? It was correctly seen as gambling with the depositors’ money. As a result of the legalization, our banking system is filled with trillions of dollars of such gambling debts, which feed asset and commodity inflation.

The elimination of FDR’s Glass-Steagall banking regulation (the separation between investment and commercial banks) in 1999, and the SEC’s ruling legitimizing stock buybacks are two other prominent examples.

Hamilton, Lincoln, and FDR all faced the need to combat speculation in their day. Hamilton used the Bank of the United States to control it, Lincoln used the greenbacks to provide an alternate source of credit, and FDR used both government regulation and his de facto national bank, the Reconstruction Finance Corporation. Where the principle is understood, the means can be found.

American System Principles to Tackle Inflation
Franklin Roosevelt signs Glass-Steagall into law on June 16, 1933.

This speculative bubble can and must be deflated, through re-regulating financial markets and other carefully targeted measures. In a letter to John Quincy Adams in 1838, the former head of the second Bank of the United States Nicholas Biddle, described bank credit [“funds’] as “only other names for the farms, the commerce, the factories, and the internal improvements of the country.” This is what money should represent once again under an American System financial regime.

Re-regulation for the General Welfare

A second major cause of the current inflationary spike is the deregulation of crucial infrastructure sectors, ranging from trucking to railroads and shipping. Price hikes and delays in these transportation sectors have led to the so-called supply-chain problems that have brought slumps in auto production and unmanageable costs for businesses and consumers around the country. Shipping costs, especially cargo ships from Asia, have gone up astronomically, in some cases as much as ten-fold.

(Of course, these shipping problems wouldn’t be quite so devastating if we were producing more of our essential goods, such as computers and cellphones, here in the United States. Or if we weren’t operating on a just-in-time production system. But more on that later.)

As Robert Kuttner pointed out in a trenchant article in the American Prospect on Jan. 18, none of these transportation problems are of recent vintage. They are the result of decades of deregulation which have resulted in cost-cutting and personnel reduction to the point where any shock to the system, such as a pandemic, would undoubtedly create a crisis.[4] That deregulation, by the way, was a bipartisan undertaking, beginning under Jimmy Carter and then taking off under President Reagan.

American System Principles to Tackle Inflation
Cost-cutting in rail, including simply abandoning lines, has contributed to transportation bottlenecks. Here, one of thousands of miles of abandoned lines.

One has to add to that, of course, the effects of consolidation of crucial industries, including the food and energy sectors. Lacking government regulation in the public interest, we are currently at the mercy of a few cartelized companies who are raising prices in the double digits despite an abundance of supply. (Take note: it’s not the farmers who are getting the bonuses.)

This deregulation in industry, like that in the financial sector, violates one of the major principles of the American System of Economics: governing for the general welfare. Alexander Hamilton in the Report on Manufactures mandated certain regulations and industry standards in his time, and others have followed in his footsteps, most notably Franklin Roosevelt. Cutbacks in maintenance, necessary redundancy, labor protections, and access – all of which have been made in deference to increasing profits, to the detriment of service – violate American System principles.

Ensure Investment in the Nation’s Basic Needs

A third major component of the current inflation is real shortages: the lack of supply. Our nation currently lacks sufficient decent housing, public transportation, and dozens of vital industries, ranging from pharmaceuticals to computer chips, many of which have been significantly outsourced overseas. These shortages themselves contribute to price increases, amplified in many cases by the need to import goods through the unreliable transportation system. People are being told to wait up to a year for furnishings, spare parts for repairs, and products whose production requires computer chips.

Hamilton’s Report on Manufactures

Both Presidents Trump and Biden have spoken passionately about bringing some of the critical industries home, especially in the high-tech area. According to the experts on the steel industry,[5] some progress was made in that sector during the Trump years, leading to the re-opening of some plants and plans for new ones. Yet, last year’s increased trade deficit with China, and the ongoing shortages in the auto and computer sectors, testify to the fact that overall progress, if any, is slow indeed.

What is required is obviously a massive investment program, backstopped or outright provided by the Federal government, to build plant and equipment, train workers, fund schools, lay track, and build housing at a rapid clip. To do that will require a change of mind-set, as well as legislation.

Alexander Hamilton was clear in the Report on Manufactures. American System presidents Lincoln and FDR showed with their stunning successes how this can be done. Despite the wars they both had to wage, they succeeded in funneling sufficient low-interest credit into the economy to jump-start new industries, build out and modernize infrastructure, and overall improve the standards of living for the population to previously unknown heights.

By re-applying American System principles, we can beat inflation in the only sensible way – by reindustrializing for a program of dramatic technological progress that will benefit not only our nation, but the world.

[1] An illuminating discussion of this Wall Street process is available here.

[2] An average of 14%, with spikes up to 40%, according to a Washington Post article Jan. 30.

[3] See

[4] For a discussion of this process in the rail industry, see

[5] USW President Tom Conway and other industry representatives reported this progress during a Roundtable with members of Congress on Sept. 30, 2021, sponsored by the Alliance for American Manufacturing.


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