Principles of Macroeconomics 6Th Edition Mankiw Solutions Manual Full Chapter PDF

Principles of Macroeconomics 6th
Edition Mankiw Solutions Manual

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7 PRODUCTION AND
GROWTH
WHAT’S NEW IN THE SIXTH EDITION?
The In the News box “Rich Farmers vs. the World’s Poor” has been replaced by “One Economist’s
Answer.”
LEARNING OBJECTIVES
By the end of this chapter, students should understand:
➢ how economic growth differs around the world.
➢ why productivity is the key determinant of a country’s standard of living.
➢ the factors that determine a country’s productivity.
➢ how a country’s policies influence its productivity growth.
WHY IS THIS CHAPTER IMPORTANT TO STUDENTS?
Chapter 7 is the first chapter in a three-chapter sequence on the production of output in the long run.
Chapter 7 addresses the determinants of the level and growth rate of output. We find that capital and
labour are among the primary determinants of output. In Chapter 8, we address how saving and
investment in capital goods affect the production of output, and in Chapter 9, we address the market for
labour.
The purpose of Chapter 7 is to examine the long-run determinants of both the level and the
growth rate of real GDP per person. Along the way, we will discover the factors that determine the
productivity of workers and address what governments might do to improve the productivity of their
citizens.
Copyright © 2014 Nelson Education Limited 119

120 Chapter 7/Production and Growth
IF NOTHING ELSE, MY STUDENTS SHOULD LEARN…
1. Economic prosperity, as measured by GDP per person, varies substantially around the world. The
average income in the world’s richest countries is more than ten times that in the world’s poorest
countries. Because growth rates of real GDP also vary substantially, the relative positions of
countries can change dramatically over time.
2. The standard of living in an economy depends on the economy’s ability to produce goods and
services. Productivity, in turn, depends on the amounts of physical capital, human capital, natural
resources, and technological knowledge available to workers.
3. Government policies can try to influence the economy’s growth rate in many ways: by encouraging
saving and investment, encouraging investment from abroad, fostering education, maintaining
property rights and political stability, allowing free trade, controlling population growth, and
promoting the research and development of new technologies.
4. The accumulation of capital is subject to diminishing returns: The more capital an economy has, the
less additional output the economy gets from an extra unit of capital. Because of diminishing
returns, higher saving leads to higher growth for a period of time, but growth eventually slows down
as the economy approaches a higher level of capital, productivity, and income. Also because of
diminishing returns, the return to capital is especially high in poor countries. Other things equal,
these countries can grow faster because of the catch-up effect.
WHAT CAN I DO IN CLASS?

I. Economic Growth Around the World
A. Table 7.1 shows data on real GDP per person for 13 countries during different periods of
time.
1. The data reveal the fact that living standards vary a great deal between these
countries.
2. Growth rates are also reported in the table. Japan has had the largest growth
rate over time, 2.71 percent per year (on average).
Use Table 7.1 to make the point that a one percentage point change in a country’s
growth rate can make a significant difference over several generations. The powerful
effects of compounding should be used to underscore the process of economic
growth.
3. Because of different growth rates, the ranking of countries by income per person
changes substantially over time.
a. In the late 19th century, the United Kingdom was the richest country in
the world.
b. Today, income per person is lower in the United Kingdom than in the
United States and Canada (two former colonies of the United Kingdom).
Copyright © 2014 Nelson Education Limited

Chapter 7/Production and Growth 121
B. FYI: Are You Richer Than the Richest American?
1. According to the magazine American Heritage, the richest American of all time is
John B. Rockefeller, whose wealth today would be the equivalent of $200 billion.
2. Yet, since Rockefeller lived from 1839 to 1937, he did not get the chance to
enjoy many of the conveniences we take for granted today such as television
and air conditioning.
3. Thus, because of technological advances, the average American today may enjoy
a “richer” life than the richest American who lived a century ago.
II. Productivity: Its Role and Determinants
A. Why Productivity Is So Important
1. Example: Robinson Crusoe
a. Because he is stranded alone, he must catch his own fish, grow his own
vegetables, and make his own clothes.
b. His standard of living depends on his ability to produce goods and

services.
2. Definition of productivity: the quantity of goods and services produced

from each hour of a worker’s time.
3. Review of Principle #8: A Country’s Standard of Living Depends on Its Ability to

Produce Goods and Services.
B. How Productivity Is Determined
1. Physical Capital per Worker
a. Definition of physical capital: the stock of equipment and

structures that are used to produce goods and services.
b. Example: Crusoe will catch more fish if he has more fishing poles.
2. Human Capital per Worker
a. Definition of human capital: the knowledge and skills that

workers acquire through education, training, and experience.
b. Example: Crusoe will catch more fish if he has been trained in the best
fishing techniques.
3. Natural Resources per Worker
a. Definition of natural resources: the inputs into the production of

goods and services that are provided by nature, such as land,
rivers, and mineral deposits.

b. Example: Crusoe will have better luck catching fish if there is a plentiful
supply around his island.
c. Case Study: Are Natural Resources A Limit To Growth? This section

points out that as the population has grown over time, we have
discovered ways to lower our use of natural resources. Thus, most
economists are not worried about shortages of natural resources.
4. Technological Knowledge
a. Definition of technological knowledge: society’s understanding of

the best ways to produce goods and services.
b. Example: Crusoe will catch more fish if he has invented a better fishing
lure.
Activity 1—The Universal Replicator
Type: In-class assignment

Topics: Technological change
Materials needed: None
Time: 20 minutes
Class limitations: Works in any size class
Purpose
This assignment explores the economic implications of an imaginary new technology, called
the Universal Replicator. Many issues about growth and change are raised.
Instructions
The Universal Replicator is a machine that can replicate any physical good. If a car is put into
the Universal Replicator, the machine will create an exact working duplicate at the touch of a
button. It will work on any non-living object.
Assume this technology becomes widely adopted throughout the country by manufacturers of
all types.
Ask the class to answer the following questions. Give them time to write an answer to a
question, and then discuss their answers before moving to the next question.
Common Answers and Points for Discussion

1. What impact would the Universal Replicator have on the economy?
Most students focus on the negative aspects of this technology: job loss, disruption of
institutions, chaos.
Some will also see the positive side: the elimination of poverty, the ability to meet all
material needs, the elimination of tedious and unsafe jobs.
2. What jobs would not be needed?

manufacturing, mining, agriculture, any assembly-line job
3. What would happen to the price of goods?

The price of goods would drop dramatically.

4. What kinds of problems would you expect?

Structural unemployment, recession, waste disposal, idleness, income distribution may
become less equitable, skills become obsolete, arms build-up, new legal structures
needed.
5. What benefits do you see?

More material goods, more leisure time, the ability to devote resources to social
problems.
6. What kinds of jobs would still be necessary?

Designers, inventors, doctors, teachers, lawyers, police, barbers, . . . . Most service jobs
will still be needed.
Of course, the Universal Replicator doesn’t really exist but technological change has had
very similar effects. For example, look at the long-term advances in agriculture. Two
hundred years ago, 80 percent of the Canadian labour force worked in farming. Today,
farming accounts for 2 percent of Canadian jobs. Agricultural production has increased
tremendously and food prices have decreased substantially.
Manufacturing has followed a similar, but less extreme path. Fewer workers are able to
produce more goods at lower costs. The “Deindustrialization of North America” has been
accompanied by increased industrial output.
As agricultural and manufacturing employment decline, we find more workers in the

service sector. Lower prices for agricultural and manufactured goods mean services
become relatively expensive. Many public issues, such as concerns about health care,
education, and police protection, are affected by this increase in the relative cost of
services.
Like the Universal Replicator, technological progress increases material well-being. And
the same questions remain: What happens to displaced workers? What happens to the
distribution of income? How are by-products, wastes, and pollution handled?
C. FYI: The Production Function
1. A production function describes the relationship between the quantity of inputs

used in production and the quantity of output from production.
2. The production function generally is written like this:
Y = A F(L, K, H, N)
where Y = output, L = quantity of labour, K = quantity of physical capital, H =

quantity of human capital, N = quantity of natural resources, A reflects the
available production technology, and F( ) is a function that shows how inputs are
combined to produce output.
3. Many production functions have a property called constant returns to scale.
a. This property implies that as all inputs are doubled, output will exactly
double.

b. This implies that the following must be true:
x Y = A F(xL, xK, xH, xN)
where x =2 if inputs are doubled.
c. This also means that if we want to examine output per worker, we could
set x = 1/L and we would get the following:
Y/L = A F(1, K/L, H/L, N/L)
This shows that output per worker depends on the amount of physical
capital per worker (K/L), the amount of human capital per worker ( H/L),
and the amount of natural resources per worker ( N/L).
III. Economic Growth and Public Policy
Ask students what factors they believe will lead to economic growth in the future.
A. The Importance of Saving and Investment
1. Because capital is a produced factor of production, a society can change the

amount of capital that it has.
2. However, there is an opportunity cost of doing so; if resources are used to

produce capital goods, fewer goods and services are produced for current
consumption.
3. Figure 7.1 shows how the amount of capital per worker influences the amount of
output per worker. The curve becomes flatter as the amount of capital increases
because of diminishing returns to capital.
B. Diminishing Returns and the Catch-Up Effect
1. Definition of diminishing returns: the property whereby the benefit from

an extra unit of an input declines as the quantity of the input increases.
a. As the capital stock rises, the extra output produced from an additional
unit of capital will fall.
b. Thus, if workers already have a large amount of capital to work with,

giving them an additional unit of capital will not increase their
productivity by much.
c. In the long run, a higher saving rate leads to a higher level of

productivity and income, but not to higher growth rates in these
variables.

2. An important implication of diminishing returns is the catch-up effect.
a. Definition of catch-up effect: the property whereby countries that

start off poor tend to grow more rapidly than countries that
start off rich.
b. When workers have very little capital to begin with, an additional unit of
capital will increase their productivity by a great deal.
C. Investment from Abroad
1. Saving by domestic residents is not the only way for a country to invest in new
capital.
2. Investment in the country by foreigners can also occur.
a. Foreign direct investment occurs when a capital investment is owned

and operated by a foreign entity.
b. Foreign portfolio investment occurs when a capital investment is

financed with foreign money but operated by domestic residents.
3. Some of the benefits of foreign investment flow back to foreign owners in the
form of profits. But the economy still experiences an increase in the capital
stock, which leads to higher productivity and higher wages.
4. The World Bank is an organization that tries to encourage the flow of investment
to poor countries.
a. The World Bank obtains funds from developed countries such as Canada
and the United States and makes loans to less-developed countries so
that they can invest in roads, sewer systems, schools, and other types of
capital.
b. The World Bank also offers these countries advice on how best to use
these funds.
D. Education
1. Investment in human capital also has an opportunity cost.
a. When students are in class, they cannot be producing goods and

services for consumption and they forego the wages that they could
have earned.
b. In less-developed countries, this opportunity cost is considered to be

high; as a result, children often drop out of school at a young age.
2. Because there are positive externalities in education, the effect of lower

education on the economic growth rate of a country can be large.
3. Many poor countries also face a “brain drain”—the best educated often leave to
go to other countries where they can enjoy a higher standard of living.

4. Rich countries as well as poor countries suffer from the brain drain. Canada also
loses highly skilled workers to the United States. This has prompted some to call
for Canada to reduce taxes to stem the flow of human capital out of Canada.
Others suggest that the Canadian brain drain problem is not significant.
E. Health and Nutrition
1. Economic historian Robert Fogel has suggested that a significant factor in long-
run economic growth is improved health from better nutrition.
2. In the News: Promoting Human Capital
a. Many young children in less-developed countries work because their

families need the income.
b. This article from The New York Times mentions that some developing
countries now give parents an immediate financial incentive to keep their
children in school.
F. Property Rights and Political Stability
1. Protection of property rights and promotion of political stability are two other
important ways that policymakers can improve economic growth.
2. There is little incentive to produce products if there is no guarantee that they

cannot be taken. Contracts must also be enforced.
3. Countries with questionable enforcement of property rights or an unstable

political climate will also have difficulty in attracting foreign (or even domestic)
investment.
G. Free Trade
1. Some countries have tried to achieve faster economic growth by avoiding

transacting with the rest of the world.
2. However, we know that trade allows a country to specialize in what it does best
and thus consume beyond its production possibilities.
3. When a country trades wheat for steel, it is as well off as it would be if it had
developed a new technology for turning wheat into steel.
4. The amount a nation trades is determined not only by government policy but
also by geography.
5. In the News: One Economist’s Answer
a. Many explanations have been proposed over time for why not all nations
are equally rich. Some explanations referred to geography, others to
religion, culture, or natural endowment.

b. However, the one explanation that seems to stand scrutiny is creating

the right incentives. When people feel safe and given the right incentives
they prosper.
H. Research and Development
1. The primary reason why living standards have improved over time has been due
to large increases in technological knowledge.
2. Knowledge can be considered to be a public good.
3. The Canadian government promotes the creation of new technological

information by providing research grants and providing tax incentives for firms
engaged in research.
4. The patent system also encourages research by granting an inventor the

exclusive right to produce the product for a specified number of years.
5. Case Study: Productivity Slowdowns and Speedups
a. From 1966 to 1973, output per hour worked grew at a rate of 1.8
percent per year. From 1974 to 1982, productivity grew by only 0.5
percent per year. Productivity slowed again during 1989 to 1995 (0.9
percent per year) before accelerating to 2.0 percent per year from 1996
to 2000.
b. The causes of the changes in productivity growth are elusive.
c. It does not appear that this slowdown can be blamed on decreases in

physical capital or human capital.
d. Many economists believe that these changes have occurred as a result of

changes in the amount of technological innovation.
I. Population Growth
1. Stretching Natural Resources
a. Thomas Malthus (an English minister and early economic thinker) argued
that an ever-increasing population meant that the world was doomed to
live in poverty forever.
b. However, he failed to understand that new ideas would be developed to
increase the production of food and other goods, including pesticides,
fertilizers, mechanized equipment, and new crop varieties.
2. Diluting the Capital Stock
a. High population growth reduces GDP per worker because rapid growth in
the number of workers forces the capital stock to be spread more thinly.
b. Countries with a high population growth have large numbers of school-

age children, placing a burden on the education system.

3. Some countries have already instituted measures to reduce population growth

rates.
4. Policies that foster equal treatment for women should raise economic
opportunities for women leading to lower rates of population.
5. Promoting Technological Progress
a. Some economists have suggested that population growth has driven

technological progress and economic prosperity.
b. In a 1993 journal article, economist Michael Kremer provided evidence

that increases in population lead to technological progress.
Start a class discussion of the tradeoffs that are necessary to sustain economic
growth. Point out that current consumption must be forgone for higher consumption
in the future. Ask students to examine the tradeoffs involved with each of the public
policies discussed.
SOLUTIONS TO TEXTBOOK PROBLEMS

Quick Quizzes
1. The approximate growth rate of real GDP per person in Canada is 1.99 percent (based on Table
7.1) from 1870 to 2008. Countries that have had faster growth include Japan, Brazil, Mexico,
and Germany; countries that have had slower growth include the United States, Argentina,
United Kingdom, India, Indonesia, Pakistan, and Bangladesh.
2. Four determinants of a country’s productivity are: (1) physical capital, which is the stock of
equipment and structures that are used to produce goods and services; (2) human capital, which
is the knowledge and skills that workers acquire through education, training, and experience; (3)
natural resources, which are inputs into production that are provided by nature, such as land,
rivers, and mineral deposits; and (4) technological knowledge, which is society’s understanding of
the best ways to produce goods and services.
3. Ways in which a government policymaker can try to raise the growth in living standards in a
society include: (1) investing more current resources in the production of capital, which has the
drawback of reducing the resources used for producing current consumption; (2) encouraging
investment from abroad, which has the drawback that some of the benefits of investment flow to
foreigners; (3) increasing education, which has an opportunity cost in that students are not
engaged in current production; (4) protecting property rights and promoting political stability, for
which no drawbacks are obvious; (5) pursuing outward-oriented policies to encourage free trade,
which may have the drawback of making a country more dependent on its trading partners; (6)
reducing the rate of population growth, which may have the drawback of reducing individual
freedom and lowering the rate of technological progress; and (7) encouraging research and
development, which (like investment) may have the drawback of reducing current consumption.

Questions for Review
1. The level of a nation’s GDP measures both the total income earned in the economy and the total
expenditure on the economy’s output of goods and services. The level of real GDP is a good
gauge of economic prosperity, and the growth of real GDP is a good gauge of economic
progress. You would rather live in a nation with a high level of GDP, even though it had a low
growth rate, than in a nation with a low level of GDP and a high growth rate, since the level of
GDP is a measure of prosperity.
2. Four determinants of productivity are: (1) physical capital, which is the stock of equipment and
structures that are used to produce goods and services; (2) human capital, which is the
knowledge and skills that workers acquire through education, training, and experience; (3)
natural resources, which are inputs into production that are provided by nature; and (4)
technological knowledge, which is society’s understanding of the best ways to produce goods and
services.
3. A university or college degree is a form of human capital. The skills learned in earning a degree
increase a worker's productivity.
4. Higher saving means fewer resources are devoted to consumption and more to producing capital
goods. The rise in the capital stock leads to rising productivity and more rapid growth in GDP for
a while. In the long run, the higher saving rate leads to a higher standard of living. A
policymaker might be deterred from trying to raise the rate of saving because doing so requires
that people reduce their consumption today and it can take a long time to get to a higher
standard of living.
5. A higher rate of saving leads to a higher growth rate temporarily, not permanently. In the short
run, increased saving leads to a larger capital stock and faster growth. But as growth continues,
diminishing returns to capital mean growth slows down and eventually settles down to its initial
rate, though this may take several decades.
6. Removing a trade restriction, such as a tariff, would lead to more rapid economic growth because
the removal of the trade restriction acts like an improvement in technology. Free trade allows all
countries to consume more goods and services.
7. The higher the rate of population growth, the lower is the level of GDP per person, because there
is less capital per person, hence lower productivity.
8. The Canadian government tries to encourage advances in technological knowledge by providing

research grants, with tax breaks for firms engaging in research and development, and through
the patent system.
Problems and Applications
1. The facts that countries import many goods and services yet must produce a large quantity of
goods and services themselves to enjoy a high standard of living are reconciled by noting that
there are substantial gains from trade. In order to be able to afford to purchase goods from
other countries, an economy must generate income. By producing many goods and services,
then trading them for goods and services produced in other countries, a nation maximizes its
standard of living.

2. a. Producing cars requires a factory with machines, robots, and an assembly line, as well as
human capital that comes from training workers.
b. Producing a high-school education requires books and buildings as well as human capital
from the teachers.
c. Producing plane travel requires planes and airports as well as human capital in terms of
pilots' knowledge.
d. Producing fruits and vegetables requires irrigation systems, harvesting machinery, and
trucks to transport the goods to the market, as well as human capital in the form of
agricultural knowledge.
3. Today's standard of living differs from those of our great-grandparents because of improved
transportation, communications, entertainment, machinery for household work, and computers,
among other things.
4. In the manufacturing sector, employment has fallen sharply while output remains about the
same percentage of GDP as before. This is good for our economy because it is the result of
increased productivity. Many manufactured goods are much cheaper than they used to be.
5. a. More investment would lead to faster economic growth in the short run.
b. The change would benefit many people in society who would have higher incomes as the
result of faster economic growth. However, there might be a transition period in which
workers and owners in consumption-good industries would get lower incomes, and
workers and owners in investment-good industries would get higher incomes. In
addition, some would have to reduce their spending for some time so that investment
could rise.
6. a. Private consumption spending includes buying food and buying clothes; private
investment spending includes people buying houses and firms buying computers. Many
other examples are possible.
b. Government consumption spending includes paying workers to administer government

programs; government investment spending includes buying military equipment and
building roads. Many other examples are possible.
7. The opportunity cost of investing in capital is the loss of consumption that results from
redirecting resources towards investment. Over-investment in capital is possible because of
diminishing marginal returns. A country can "over-invest" in capital if people would prefer to
have higher consumption spending and less future growth. The opportunity cost of investing in
human capital is also the loss of consumption that is needed to provide the resources for
investment. A country could "over-invest" in human capital if people were too highly educated
for the jobs they could get⎯for example, if the best job a Ph.D. in philosophy could find is
managing a restaurant.
8. a. When a German firm opens a factory in Quebec, it represents foreign direct investment.
b. The investment increases Canadian GDP since it increases production in Canada. The
effect on Canadian GNP would be smaller since the owners would get paid a return on
their investment that would be part of German GNP rather than Canadian GNP.

9. a. Canada benefited from the American investment since it made our capital stock larger,
increasing our economic growth.
b. It would have been better for Canada to make the investments itself since then it would
have received the returns on the investment itself, instead of the returns going to the
United States.
10. Greater educational opportunities for women could lead to faster economic growth in the
countries of South Asia because increased human capital would increase productivity and there
would be external effects from greater knowledge in the country. Second, increased educational
opportunities for young women may lower the population growth rate because such opportunities
raise the opportunity cost of having a child.
11. GDP2038 = 1000(1+0.035)25
= 1000(1.035)25
= 2363 million
GDP2038 = 1000(1 +0.040)25
= 2666 million
The value of GDP in 2038 rises as the annual growth rate increases. Policies to promote even
slightly faster growth rates in GDP lead to more employment, productivity, and higher standards
of living.

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and who attribute to the general government a right utterly
incompatible with what all acknowledge to be its limited and
restricted character; an error originating principally, as I must think,
in not duly reflecting on the nature of our institutions, and on what
constitutes the only rational object of all political constitutions.
It has been well said by one of the most sagacious men of
antiquity, that the object of a constitution is to restrain the
government, as that of laws is to restrain individuals. The remark is
correct, nor is it less true where the government is vested in a
majority, than where it is in a single or a few individuals; in a
republic, than a monarchy or aristocracy. No one can have a higher
respect for the maxim that the majority ought to govern than I have,
taken in its proper sense, subject to the restrictions imposed by the
Constitution, and confined to subjects in which every portion of the
community have similar interests; but it is a great error to suppose,
as many do, that the right of a majority to govern is a natural and not
a conventional right; and, therefore, absolute and unlimited. By
nature every individual has the right to govern himself; and
governments, whether founded on majorities or minorities, must
derive their right from the assent, expressed or implied, of the
governed, and be subject to such limitations as they may impose.
Where the interests are the same, that is, where the laws that may
benefit one will benefit all, or the reverse, it is just and proper to
place them under the control of the majority; but where they are
dissimilar, so that the law that may benefit one portion may be
ruinous to another, it would be, on the contrary, unjust and absurd
to subject them to its will: and such I conceive to be the theory on
which our Constitution rests.
That such dissimilarity of interests may exist it is impossible to
doubt. They are to be found in every community, in a greater or less
degree, however small or homogeneous, and they constitute,
everywhere, the great difficulty of forming and preserving free
institutions. To guard against the unequal action of the laws, when
applied to dissimilar and opposing interests, is in fact what mainly
renders a constitution indispensable; to overlook which in reasoning
on our Constitution, would be to omit the principal element by which
to determine its character. Were there no contrariety of interests,
nothing would be more simple and easy than to form and preserve
free institutions. The right of suffrage alone would be a sufficient
guarantee. It is the conflict of opposing interests which renders it the
most difficult work of man.
Where the diversity of interests exists in separate and distinct
classes of the community, as is the case in England, and was formerly
the case in Sparta, Rome, and most of the free states of antiquity, the
rational constitutional provision is, that each should be represented
in the government as a separate estate, with a distinct voice, and a
negative on the acts of its co-estates, in order to check their
encroachments. In England the constitution has assumed expressly
this form, while in the governments of Sparta and Rome the same
thing was effected, under different but not much less efficacious
forms. The perfection of their organization, in this particular, was
that which gave to the constitutions of these renowned states all of
their celebrity, which secured their liberty for so many centuries, and
raised them to so great a height of power and prosperity. Indeed, a
constitutional provision giving to the great and separate interests of
the community the right of self-protection, must appear to those who
will duly reflect on the subject, not less essential to the preservation
of liberty than the right of suffrage itself. They in fact have a common
object, to effect which the one is as necessary as the other—to secure
responsibility; that is, that those who make and execute the laws
should be accountable to those on whom the laws in reality operate;
the only solid and durable foundation of liberty. If without the right
to suffrage our rulers would oppress us, so without the right of self-
protection, the major would equally oppress the minor interests of
the community. The absence of the former would make the governed
the slaves of the rulers, and of the latter the feebler interests the
victim of the stronger.
Happily for us we have no artificial and separate classes of society.
We have wisely exploded all such distinctions; but we are not, on that
account, exempt from all contrariety of interests, as the present
distracted and dangerous condition of our country unfortunately but
too clearly proves. With us they are almost exclusively geographical,
resulting mainly from difference of climate, soil, situation, industry,
and production, but are not, therefore, less necessary to be protected
by an adequate constitutional provision than where the distinct
interests exist in separate classes. The necessity is, in truth, greater,
as such separate and dissimilar geographical interests are more liable
to come into conflict, and more dangerous when in that state than
those of any other description; so much so, that ours is the first
instance on record where they have not formed in an extensive
territory separate and independent communities, or subjected the
whole to despotic sway. That such may not be our unhappy fate also,
must be the sincere prayer of every lover of his country.
So numerous and diversified are the interests of our country, that
they could not be fairly represented in a single government,
organized so as to give to each great and leading interest a separate
and distinct voice, as in governments to which I have referred. A plan
was adopted better suited to our situation, but perfectly novel in its
character. The powers of the government were divided, not as
heretofore, in reference to classes, but geographically. One general
government was formed for the whole, to which was delegated all of
the powers supposed to be necessary to regulate the interests
common to all of the states, leaving others subject to the separate
control of the states, being from their local and peculiar character
such that they could not be subject to the will of the majority of the
whole Union, without the certain hazard of injustice and oppression.
It was thus that the interests of the whole were subjected, as they
ought to be, to the will of the whole, while the peculiar and local
interests were left under the control of the states separately, to whose
custody only they could be safely confided. This distribution of
power, settled solemnly by a constitutional compact, to which all of
the states are parties, constitutes the peculiar character and
excellence of our political system. It is truly and emphatically
American, without example or parallel.
To realize its perfection, we must view the general government and
the states as a whole, each in its proper sphere, sovereign and
independent; each perfectly adapted to their respective objects; the
states acting separately, representing and protecting the local and
peculiar interests; acting jointly, through one general government,
with the weight respectively assigned to each by the Constitution,
representing and protecting the interest of the whole, and thus
perfecting, by an admirable but simple arrangement, the great
principle of representation and responsibility, without which no
government can be free or just. To preserve this sacred distribution
as originally settled, by coercing each to move in its prescribed orb, is
the great and difficult problem, on the solution of which the duration
of our Constitution, of our Union, and, in all probability our liberty,
depends. How is this to be effected?
The question is new when applied to our peculiar political
organization, where the separate and conflicting interests of society
are represented by distinct but connected governments; but is in
reality an old question under a new form, long since perfectly solved.
Whenever separate and dissimilar interests have been separately
represented in any government; whenever the sovereign power has
been divided in its exercise, the experience and wisdom of ages have
devised but one mode by which such political organization can be
preserved; the mode adopted in England, and by all governments,
ancient or modern, blessed with constitutions deserving to be called
free; to give to each co-estate the right to judge of its powers, with a
negative or veto on the acts of the others, in order to protect against
encroachments the interests it particularly represents; a principle
which all of our constitutions recognize in the distribution of power
among their respective departments, as essential to maintain the
independence of each, but which, to all who will duly reflect on the
subject, must appear far more essential, for the same object, in that
great and fundamental distribution of powers between the states and
general government. So essential is the principle, that to withhold
the right from either, where the sovereign power is divided, is, in
fact, to annul the division itself, and to consolidate in the one left in
the exclusive possession of the right, all of the powers of the
government; for it is not possible to distinguish practically between a
government having all power, and one having the right to take what
powers it pleases. Nor does it in the least vary the principle, whether
the distribution of power between co-estates, as in England, or
between distinctly organized but connected governments, as with us.
The reason is the same in both cases, while the necessity is greater in
our case, as the danger of conflict is greater where the interests of a
society are divided geographically than in any other, as has already
been shown.
These truths do seem to me to be incontrovertible; and I am at a
loss to understand how any one, who has maturely reflected on the
nature of our institutions, or who has read history or studied the
principles of free government to any purpose, can call them in
question. The explanation must, it appears to me, be sought in the
fact, that in every free state, there are those who look more to the
necessity of maintaining power, than guarding against its abuses. I
do not intend reproach, but simply to state a fact apparently
necessary to explain the contrariety of opinions, among the
intelligent, where the abstract consideration of the subject would
seem scarcely to admit of doubt. If such be the true cause, I must
think the fear of weakening the government too much in this case to
be in a great measure unfounded, or at least that the danger is much
less from that than the opposite side. I do not deny that a power of so
high a nature may be abused by a state, but when I reflect that the
states unanimously called the general government into existence
with all of its powers, which they freely surrendered on their part,
under the conviction that their common peace, safety and prosperity
required it; that they are bound together by a common origin, and
the recollection of common suffering and common triumph in the
great and splendid achievement of their independence; and the
strongest feelings of our nature, and among them, the love of
national power and distinction, are on the side of the Union; it does
seem to me, that the fear which would strip the states of their
sovereignty, and degrade them, in fact, to mere dependent
corporations, lest they should abuse a right indispensable to the
peaceable protection of those interests which they reserved under
their own peculiar guardianship when they created the general
government, is unnatural and unreasonable. If those who voluntarily
created the system, cannot be trusted to preserve it, what power can?
So far from extreme danger, I hold that there never was a free
state, in which this great conservative principle, indispensable in all,
was ever so safely lodged. In others, when the co-estates,
representing the dissimilar and conflicting interests of the
community, came into contact, the only alternative was compromise,
submission or force. Not so in ours. Should the general government
and a state come into conflict, we have a higher remedy; the power
which called the general government into existence, which gave it all
its authority, and can enlarge, contract, or abolish its powers at its
pleasure, may be invoked. The states themselves may be appealed to,
three-fourths of which, in fact, form a power, whose decrees are the
constitution itself, and whose voice can silence all discontent. The
utmost extent then of the power is, that a state acting in its sovereign
capacity, as one of the parties to the constitutional compact, may
compel the government, created by that compact, to submit a
question touching its infraction to the parties who created it; to avoid
the supposed dangers of which, it is proposed to resort to the novel,
the hazardous, and, I must add, fatal project of giving to the general
government the sole and final right of interpreting the Constitution,
thereby reserving the whole system, making that instrument the
creature of its will, instead of a rule of action impressed on it at its
creation, and annihilating in fact the authority which imposed it, and
from which the government itself derives its existence.
That such would be the result, were the right in question vested in
the legislative or executive branch of the government, is conceded by
all. No one has been so hardy as to assert that Congress or the
President ought to have the right, or to deny that, if vested finally
and exclusively in either, the consequences which I have stated
would not necessarily follow; but its advocates have been reconciled
to the doctrine, on the supposition that there is one department of
the general government, which, from its peculiar organization,
affords an independent tribunal through which the government may
exercise the high authority which is the subject of consideration, with
perfect safety to all.
I yield, I trust, to few in my attachment to the judiciary
department. I am fully sensible of its importance, and would
maintain it to the fullest extent in its constitutional powers and
independence; but it is impossible for me to believe that it was ever
intended by the Constitution, that it should exercise the power in
question, or that it is competent to do so, and, if it were, that it would
be a safe depository of the power.
Its powers are judicial and not political, and are expressly confined
by the Constitution “to all cases in law and equity arising under this
Constitution, the laws of the United States, and the treaties made, or
which shall be made, under its authority;” and which I have high
authority in asserting, excludes political questions, and comprehends
those only where there are parties amenable to the process of the
court.[82] Nor is its incompetency less clear, than its want of
constitutional authority. There may be many and the most dangerous
infractions on the part of Congress, of which it is conceded by all, the
court, as a judicial tribunal, cannot from its nature take cognisance.
The tariff itself is a strong case in point; and the reason applies
equally to all others, where Congress perverts a power from an object
intended to one not intended, the most insidious and dangerous of
all the infractions; and which may be extended to all of its powers,
more especially to the taxing and appropriating. But supposing it
competent to take cognisance of all infractions of every description,
the insuperable objection still remains, that it would not be a safe
tribunal to exercise the power in question.
It is an universal and fundamental political principle, that the
power to protect, can safely be confided only to those interested in
protecting, or their responsible agents—a maxim not less true in
private than in public affairs. The danger in our system is, that the
general government, which represents the interests of the whole,
may encroach on the states, which represent the peculiar and local
interests, or that the latter may encroach on the former.
In examining this point, we ought not to forget that the
government, through all of its departments, judicial as well as others,
is administered by delegated and responsible agents; and that the
power which really controls ultimately all the movements, is not in
the agents, but those who elect or appoint them. To understand then
its real character, and what would be the action of the system in any
supposable case, we must raise our view from the mere agents, to
this high controlling power which finally impels every movement of
the machine. By doing so, we shall find all under the control of the
will of a majority, compounded of the majority of the states, taken as
corporate bodies, and the majority of the people of the states
estimated in federal numbers. These united constitute the real and
final power, which impels and directs the movements of the general
government. The majority of the states elect the majority of the
Senate; of the people of the states, that of the House of
Representatives; the two united, the President; and the President
and a majority of the Senate appoint the judges, a majority of whom
and a majority of the Senate and the House with the President, really
exercise all of the powers of the government with the exception of the
cases where the Constitution requires a greater number than a
majority. The judges are, in fact, as truly the judicial representatives
of this united majority, as the majority of Congress itself, or the
President, is its legislative or executive representative; and to confide
the power to the judiciary to determine finally and conclusively what
powers are delegated and what reserved, would be in reality to
confide it to the majority, whose agents they are, and by whom they
can be controlled in various ways; and, of course, to subject (against
the fundamental principle of our system, and all sound political
reasoning) the reserved powers of the states, with all of the local and
peculiar interests they were intended to protect, to the will of the
very majority against which the protection was intended. Nor will the
tenure by which the judges hold their office, however valuable the
provision in many other respects, materially vary the case. Its highest
possible effect would be to retard, and not finally to resist, the will of
a dominant majority.
But it is useless to multiply arguments. Were it possible that
reason could settle a question where the passions and interests of
men are concerned, this point would have been long since settled for
ever, by the state of Virginia. The report of her legislature, to which I
have already referred, has really, in my opinion, placed it beyond
controversy. Speaking in reference to this subject, it says, “It has
been objected” (to the right of a state to interpose for the protection
of her reserved rights), “that the judicial authority is to be regarded
as the sole expositor of the Constitution; on this subject it might be
observed first that there may be instances of usurped powers which
the forms of the Constitution could never draw within the control of
the judicial department; secondly, that if the decision of the judiciary
be raised above the sovereign parties to the Constitution, the
decisions of the other departments, not carried by the forms of the
Constitution before the judiciary, must be equally authoritative and
final with the decision of that department. But the proper answer to
the objection is, that the resolution of the General Assembly relates
to those great and extraordinary cases, in which all of the forms of
the Constitution may prove ineffectual against infraction dangerous
to the essential rights of the parties to it. The resolution supposes
that dangerous powers not delegated, may not only be usurped and
executed by the other departments, but that the judicial department
may also exercise or sanction dangerous powers beyond the grant of
the Constitution, and consequently that the ultimate right of the
parties to the Constitution to judge whether the compact has been
dangerously violated, must extend to violations by one delegated
authority, as well as by another—by the judiciary, as well as by the
executive or legislative.”
Against these conclusive arguments, as they seem to me, it is
objected, that if one of the parties has the right to judge of infractions
of the Constitution, so has the other, and that consequently in cases
of contested powers between a state and the general government,
each would have a right to maintain its opinion, as is the case when
sovereign powers differ in the construction of treaties or compacts,
and that of course it would come to be a mere question of force. The
error is in the assumption that the general government is a party to
the constitutional compact. The states, as has been shown, formed
the compact, acting as sovereign and independent communities. The
general government is but its creature; and though in reality a
government with all the rights and authority which belong to any
other government, within the orb of its powers, it is, nevertheless, a
government emanating from a compact between sovereigns, and
partaking, in its nature and object, of the character of a joint
commission, appointed to superintend and administer the interests
in which all are jointly concerned, but having, beyond its proper
sphere, no more power than if it did not exist. To deny this would be
to deny the most incontestable facts, and the clearest conclusions;
while to acknowledge its truth, is to destroy utterly the objection that
the appeal would be to force, in the case supposed. For if each party
has a right to judge, then under our system of government, the final
cognisance of a question of contested power would be in the states,
and not in the general government. It would be the duty of the latter,
as in all similar cases of a contest between one or more of the
principals and a joint commission or agency, to refer the contest to
the principals themselves. Such are the plain dictates of reason and
analogy both. On no sound principle can the agents have a right to
final cognisance, as against the principals, much less to use force
against them, to maintain their construction of their powers. Such a
right would be monstrous; and has never, heretofore, been claimed
in similar cases.
That the doctrine is applicable to the case of a contested power
between the states and the general government, we have the
authority not only of reason and analogy, but of the distinguished
statesman already referred to. Mr. Jefferson, at a late period of his
life, after long experience and mature reflection, says, “With respect
to our state and federal governments, I do not think their relations
are correctly understood by foreigners. They suppose the former
subordinate to the latter. This is not the case. They are co-ordinate
departments of one simple and integral whole. But you may ask if the
two departments should claim each the same subject of power, where
is the umpire to decide between them? In cases of little urgency or
importance, the prudence of both parties will keep them aloof from
the questionable ground; but if it can neither be avoided nor
compromised, a convention of the states must be called to ascribe the
doubtful power to that department which they may think best.”—It is
thus that our Constitution, by authorizing amendments, and by
prescribing the authority and mode of making them, has by a simple
contrivance, with its characteristic wisdom, provided a power which,
in the last resort, supersedes effectually the necessity and even the
pretext for force; a power to which none can fairly object; with which
the interests of all are safe; which can definitely close all
controversies in the only effectual mode, by freeing the compact of
every defect and uncertainty, by an amendment of the instrument
itself. It is impossible for human wisdom, in a system like ours, to
devise another mode which shall be safe and effectual, and at the
same time consistent with what are the relations and acknowledged
powers of the two great departments of our government. It gives a
beauty and security peculiar to our system, which, if duly
appreciated, will transmit its blessings to the remotest generations;
but, if not, our splendid anticipations of the future will prove but an
empty dream. Stripped of all its covering, and the naked question is,
whether ours is a federal or a consolidated government: a
constitutional or absolute one; a government resting ultimately on
the solid basis of the sovereignty of the states, or on the unrestrained
will of a majority; a form of government, as in all other unlimited
ones, in which injustice and violence, and force, must finally prevail.
Let it never be forgotten, that where the majority rules, the minority
is the subject; and that if we should absurdly attribute to the former
the exclusive right of construing the Constitution, there would be in
fact between the sovereign and subject, under such a government, no
constitution; or at least nothing deserving the name, or serving the
legitimate object of so sacred an instrument.
How the states are to exercise this high power of interposition
which constitutes so essential a portion of their reserved rights that it
cannot be delegated without an entire surrender of their sovereignty,
and converting our system from a federal into a consolidated
government, is a question that the states only are competent to
determine. The arguments which prove that they possess the power,
equally prove that they are, in the language of Jefferson, “the rightful
judges of the mode and measure of redress.” But the spirit of
forbearance, as well as the nature of the right itself, forbids a
recourse to it, except in cases of dangerous infractions of the
Constitution; and then only in the last resort, when all reasonable
hope of relief from the ordinary action of the government has failed;
when, if the right to interpose did not exist, the alternative would be
submission and oppression on the one side, or resistance by force on
the other. That our system should afford, in such extreme cases, an
intermediate point between these dire alternatives, by which the
government may be brought to a pause, and thereby an interval
obtained to compromise differences, or, if impracticable, be
compelled to submit the question to a constitutional adjustment,
through an appeal to the states themselves, is an evidence of its high
wisdom; an element not, as is supposed by some, of weakness, but of
strength; not of anarchy or revolution, but of peace and safety. Its
general recognition would of itself, in a great measure, if not
altogether, supersede the necessity of its exercise, by impressing on
the movements of the government that moderation and justice so
essential to harmony and peace, in a country of such vast extent and
diversity of interests as ours; and would, if controversy should come,
turn the resentment of the aggrieved from the system to those who
had abused its powers (a point all important), and cause them to
seek redress, not in revolution or overthrow, but in reformation. It is,
in fact, properly understood, a substitute where the alternative would
be force, tending to prevent, and if that fails, to correct peaceably the
aberrations to which all political systems are liable, and which, if
permitted to accumulate, without correction, must finally end in a
general catastrophe.
Speech of Henry Clay
In Defence of the American System[83] in which is given the Previous

History of Tariff Contests in the Senate of the United States,
February 2d, 3d and 6th, 1832.
[Mr. Clay, having retired from Congress soon after the establishment of the
American System, by the passage of the Tariff of 1824, did not return to it till 1831–
2, when the opponents of this system had acquired the ascendency, and were bent
on its destruction. An act reducing the duties on many of the protected articles,
was devised and passed. The bill being under consideration in the Senate, Mr. Clay
addressed that body as follows:]
In one sentiment, Mr. President, expressed by the honorable
gentleman from South Carolina, (General Hayne,) though perhaps
not in the sense intended by him, I entirely concur. I agree with him,
that the decision on the system of policy embraced in this debate,
involves the future destiny of this growing country. One way I verily
believe, it would lead to deep and general distress, general
bankruptcy and national ruin, without benefit to any part of the
Union: the other, the existing prosperity will be preserved and
augmented, and the nation will continue rapidly to advance in
wealth, power, and greatness, without prejudice to any section of the
confederacy.
Thus viewing the question, I stand here as the humble but zealous
advocate, not of the interests of one State, or seven States only, but of
the whole Union. And never before have I felt more intensely, the
overpowering weight of that share of responsibility which belongs to
me in these deliberations. Never before have I had more occasion
than I now have to lament my want of those intellectual powers, the
possession of which might enable me to unfold to this Senate, and to
illustrate to this people great truths, intimately connected with the
lasting welfare of my country. I should, indeed, sink overwhelmed
and subdued beneath the appalling magnitude of the task which lies
before me, if I did not feel myself sustained and fortified by a
thorough consciousness of the justness of the cause which I have
espoused, and by a persuasion I hope not presumptuous, that it has
the approbation of that Providence who has so often smiled upon
these United States.
Eight years ago it was my painful duty to present to the other
House of Congress, an unexaggerated picture of the general distress
pervading the whole land. We must all yet remember some of its
frightful features. We all know that the people were then oppressed
and borne down by an enormous load of debt; that the value of
property was at the lowest point of depression; that ruinous sales
and sacrifices were everywhere made of real estate; that stop laws,
and relief laws, and paper money were adopted to save the people
from impending destruction; that a deficit in the public revenue
existed, which compelled government to seize upon, and divert from
its legitimate object the appropriations to the sinking fund, to
redeem the national debt; and that our commerce and navigation
were threatened with a complete paralysis. In short, sir, if I were to
select any term of seven years since the adoption of the present
constitution which exhibited a scene of the most widespread dismay
and desolation, it would be exactly that term of seven years which
immediately preceded the establishment of the tariff of 1824.
I have now to perform the more pleasing task of exhibiting an
imperfect sketch of the existing state of the unparalleled prosperity
of the country. On a general survey, we behold cultivation extended,
the arts flourishing, the face of the country improved, our people
fully and profitably employed, and the public countenance exhibiting
tranquillity, contentment and happiness. And if we descend into
particulars, we have the agreeable contemplation of a people out of
debt, land rising slowly in value, but in a secure and salutary degree;
a ready though not extravagant market for all the surplus
productions of our industry; innumerable flocks and herds browsing
and gamboling on ten thousand hills and plains, covered with rich
and verdant grasses; our cities expanded, and whole villages
springing up, as it were, by enchantment; our exports and imports
increased and increasing; our tonnage, foreign and coastwise,
swelling and fully occupied; the rivers of our interior animated by the
perpetual thunder and lightning of countless steam-boats; the
currency sound and abundant; the public debt of two wars nearly
redeemed; and, to crown all, the public treasury overflowing,
embarrassing Congress, not to find subjects of taxation, but to select
the objects which shall be liberated from the impost. If the term of
seven years were to be selected, of the greatest prosperity which this
people have enjoyed since the establishment of their present
constitution, it would be exactly that period of seven years which
immediately followed the passage of the tariff of 1824.
This transformation of the condition of the country from gloom
and distress to brightness and prosperity, has been mainly the work
of American legislation, fostering American industry, instead of
allowing it to be controlled by foreign legislation, cherishing foreign
industry. The foes of the American System, in 1824, with great
boldness and confidence, predicted, 1st. The ruin of the public
revenue, and the creation of a necessity to resort to direct taxation.
The gentleman from South Carolina, (General Hayne,) I believe,
thought that the tariff of 1824 would operate a reduction of revenue
to the large amount of eight millions of dollars. 2d. The destruction
of our navigation. 3d. The desolation of commercial cities. And 4th.
The augmentation of the price of objects of consumption, and further
decline in that of the articles of our exports. Every prediction which
they made has failed—utterly failed. Instead of the ruin of the public
revenue, with which they then sought to deter us from the adoption
of the American System, we are now threatened with its subversion,
by the vast amount of the public revenue produced by that system.
Every branch of our navigation has increased.
Whilst we thus behold the entire failure of all that was foretold
against the system, it is a subject of just felicitation to its friends, that
all their anticipations of its benefits have been fulfilled, or are in
progress of fulfillment. The honorable gentleman from South
Carolina has made an allusion to a speech made by me, in 1824, in
the other House, in support of the tariff, and to which, otherwise, I
should not have particularly referred. But I would ask any one, who
can now command the courage to peruse that long production, what
principle there laid down is not true? what prediction then made has
been falsified by practical experience?
It is now proposed to abolish the system, to which we owe so much
of the public prosperity, and it is urged that the arrival of the period
of the redemption of the public debt has been confidently looked to
as presenting a suitable occasion to rid the country of evils with
which the system is alleged to be fraught. Not an inattentive observer
of passing events, I have been aware that, among those who were
most early pressing the payment of the public debt, and upon that
ground were opposing appropriations to other great interests, there
were some who cared less about the debt than the accomplishment of
other objects. But the people of the United States have not coupled
the payment of their public debt with the destruction of the
protection of their industry, against foreign laws and foreign
industry. They have been accustomed to regard the extinction of the
public debt as relief from a burthen, and not as the infliction of a
curse. If it is to be attended or followed by the subversion of the
American system, and an exposure of our establishments and our
productions to the unguarded consequences of the selfish policy of
foreign powers, the payment of the public debt will be the bitterest of
curses. Its fruit will be like the fruit
“Of that forbidden tree, whose mortal taste
Brought death into the world, and all our woe,
With loss of Eden.”
If the system of protection be founded on principles erroneous in

theory, pernicious in practice—above all if it be unconstitutional, as
is alleged, it ought to be forthwith abolished, and not a vestige of it
suffered to remain. But, before we sanction this sweeping
denunciation, let us look a little at this system, its magnitude, its
ramifications, its duration, and the high authorities which have
sustained it. We shall see that its foes will have accomplished
comparatively nothing, after having achieved their present aim of
breaking down our iron-foundries, our woolen, cotton, and hemp
manufactories, and our sugar plantations. The destruction of these
would, undoubtedly, lead to the sacrifice of immense capital, the ruin
of many thousands of our fellow-citizens, and incalculable loss to the
whole community. But their prostration would not disfigure, nor
produce greater effect upon the whole system of protection, in all its
branches, than the destruction of the beautiful domes upon the
capitol would occasion to the magnificent edifice which they
surmount. Why, sir, there is scarcely an interest, scarcely a vocation
in society, which is not embraced by the beneficence of this system.
It comprehends our coasting tonnage and trade, from which all
foreign tonnage is absolutely excluded.
It includes all our foreign tonnage, with the inconsiderable
exception made by treaties of reciprocity with a few foreign powers.
It embraces our fisheries, and all our hardy and enterprising
fishermen.
It extends to almost every mechanic art: * * *
It extends to all lower Louisiana, the Delta of which might as well
be submerged again in the Gulf of Mexico, from which it has been a
gradual conquest, as now to be deprived of the protecting duty upon
its great staple.
It affects the cotton planter himself, and the tobacco planter, both
of whom enjoy protection.
Such are some of the items of this vast system of protection, which
it is now proposed to abandon. We might well pause and
contemplate, if human imagination could conceive the extent of
mischief and ruin from its total overthrow, before we proceed to the
work of destruction. Its duration is worthy also of serious
consideration. Not to go behind the constitution, its date is coeval
with that instrument. It began on the ever memorable fourth day of
July—the fourth day of July, 1789. The second act which stands
recorded in the statute book, bearing the illustrious signature of
George Washington, laid the corner-stone of the whole system. That
there might be no mistake about the matter, it was then solemnly
proclaimed to the American people and to the world, that it was
necessary for “the encouragement and protection of manufactures,”
that duties should be laid. It is in vain to urge the small amount of
the measure of the protection then extended. The great principle was
then established by the fathers of the constitution, with the father of
his country at their head. And it cannot now be questioned, that, if
the government had not then been new and the subject untried, a
greater measure of protection would have been applied, if it had been
supposed necessary. Shortly after, the master minds of Jefferson and
Hamilton were brought to act on this interesting subject. Taking
views of it appertaining to the departments of foreign affairs and of
the treasury, which they respectively filled, they presented, severally,
reports which yet remain monuments of their profound wisdom, and
came to the same conclusion of protection to American industry. Mr.
Jefferson argued that foreign restrictions, foreign prohibitions, and
foreign high duties, ought to be met at home by American
restrictions, American prohibitions, and American high duties. Mr.
Hamilton, surveying the entire ground, and looking at the inherent
nature of the subject, treated it with an ability, which, if ever
equalled, has not been surpassed, and earnestly recommended
protection.
The wars of the French revolution commenced about this period,
and streams of gold poured into the United States through a
thousand channels, opened or enlarged by the successful commerce
which our neutrality enabled us to prosecute. We forgot or
overlooked, in the general prosperity, the necessity of encouraging
our domestic manufactures. Then came the edicts of Napoleon, and
the British orders in council; and our embargo, non-intercourse,
non-importation, and war, followed in rapid succession. These
national measures, amounting to a total suspension, for the period of
their duration, of our foreign commerce, afforded the most
efficacious encouragement to American manufactures; and
accordingly they everywhere sprung up. While these measures of
restriction, and this state of war continued, the manufacturers were
stimulated in their enterprise by every assurance of support, by
public sentiment, and by legislative resolves. It was about that period
(1808) that South Carolina bore her high testimony to the wisdom of
the policy, in an act of her legislature, the preamble of which, now
before me, reads:
“Whereas, the establishment and encouragement of domestic
manufactures, is conducive to the interests of a State, by adding new
incentives to industry, and as being the means of disposing to
advantage the surplus productions of the agriculturist: and whereas,
in the present unexampled state of the world, their establishment in
our country is not only expedient, but politic in rendering us
independent of foreign nations.”
The legislature, not being competent to afford the most efficacious
aid, by imposing duties on foreign rival articles, proceeded to
incorporate a company.
Peace, under the treaty of Ghent, returned in 1815, but there did
not return with it the golden days which preceded the edicts levelled
at our commerce by Great Britain and France. It found all Europe
tranquilly resuming the arts and business of civil life. It found
Europe no longer the consumer of our surplus, and the employer of
our navigation, but excluding, or heavily burthening, almost all the
productions of our agriculture, and our rivals in manufactures, in
navigation, and in commerce. It found our country, in short, in a
situation totally different from all the past—new and untried. It
became necessary to adapt our laws, and especially our laws of
impost, to the new circumstances in which we found ourselves.
Accordingly, that eminent and lamented citizen, then at the head of
the treasury, (Mr. Dallas,) was required, by a resolution of the House
of Representatives, under date the twenty-third day of February,
1815, to prepare and report to the succeeding session of Congress, a
system of revenue conformable with the actual condition of the
country. He had the circle of a whole year to perform the work,
consulted merchants, manufacturers, and other practical men, and
opened an extensive correspondence. The report which he made at
the session of 1816, was the result of his inquiries and reflections,
and embodies the principles which he thought applicable to the
subject. It has been said, that the tariff of 1816 was a measure of
mere revenue, and that it only reduced the war duties to a peace
standard. It is true that the question then was, how much and in
what way should the double duties of the war be reduced? Now, also,
the question is, on what articles shall the duties be reduced so as to
subject the amounts of the future revenue to the wants of the
government? Then it was deemed an inquiry of the first importance,
as it should be now, how, the reduction should be made, so as to
secure proper encouragement to our domestic industry. That this
was a leading object in the arrangement of the tariff of 1816, I well
remember, and it is demonstrated by the language of Mr. Dallas. He
says in his report:
“There are few, if any governments, which do not regard the
establishment of domestic manufactures as a chief object of public
policy. The United States have always so regarded it. * * * The
demands of the country, while the acquisitions of supplies from
foreign nations was either prohibited or impracticable, may have
afforded sufficient inducement for this investment of capital, and
this application of labor; but the inducement, in its necessary extent,
must fail when the day of competition returns. Upon that change in
the condition of the country, the preservation of the manufactures,
which private citizens under favorable auspices have constituted the
property of the nation, becomes a consideration of general policy, to
be resolved by a recollection of past embarrassments; by the
certainty of an increased difficulty of reinstating, upon any
emergency, the manufactures which shall be allowed to perish and
pass away,” &c.
The measure of protection which he proposed was not adopted, in
regard to some leading articles, and there was great difficulty in
ascertaining what it ought to have been. But the principle was then
distinctly asserted and fully sanctioned.
The subject of the American system was again brought up in 1820,
by the bill reported by the chairman of the committee of
manufactures, now a member of the bench of the Supreme Court of
the United States, and the principle was successfully maintained by
the representatives of the people; but the bill which they passed was
defeated in the Senate. It was revived in 1824; the whole ground
carefully and deliberately explored, and the bill then introduced,
receiving all the sanctions of the constitution, became the law of the
land. An amendment of the system was proposed in 1828, to the
history of which I refer with no agreeable recollections. The bill of
that year, in some of its provisions, was framed on principles directly
adverse to the declared wishes of the friends of the policy of
protection. I have heard, without vouching for the fact, that it was so
framed, upon the advice of a prominent citizen, now abroad, with the
view of ultimately defeating the bill, and with assurances that, being
altogether unacceptable to the friends of the American system, the
bill would be lost. Be that as it may, the most exceptional features of
the bill were stamped upon it, against the earnest remonstrances of
the friends of the system, by the votes of southern members, upon a
principle, I think, as unsound in legislation as it is reprehensible in
ethics. The bill was passed, notwithstanding all this, it having been
deemed better to take the bad along with the good which it
contained, than reject it altogether. Subsequent legislation has
corrected the error then perpetrated, but still that measure is
vehemently denounced by gentlemen who contributed to make it
what it was.
Thus, sir, has this great system of protection been gradually built,
stone upon stone, and step by step, from the fourth of July, 1789,
down to the present period. In every stage of its progress it has
received the deliberate sanction of Congress. A vast majority of the
people of the United States has approved and continue to approve it.
Every chief magistrate of the United States, from Washington to the
present, in some form or other, has given to it the authority of his
name; and however the opinions of the existing President are
interpreted South of Mason’s and Dixon’s line, on the north they are
at least understood to favor the establishment of a judicious tariff.
The question, therefore, which we are now called upon to
determine, is not whether we shall establish a new and doubtful
system of policy, just proposed, and for the first time presented to
our consideration, but whether we shall break down and destroy a
long established system, patiently and carefully built up and
sanctioned, during a series of years, again and again, by the nation
and its highest and most revered authorities. Are we not bound
deliberately to consider whether we can proceed to this work of
destruction without a violation of the public faith? The people of the
United States have justly supposed that the policy of protecting their
industry against foreign legislation and foreign industry was fully
settled, not by a single act, but by repeated and deliberate acts of
government, performed at distant and frequent intervals. In full
confidence that the policy was firmly and unchangeably fixed,
thousands upon thousands have invested their capital, purchased a
vast amount of real and other estate, made permanent
establishments, and accommodated their industry. Can we expose to
utter and irretrievable ruin this countless multitude, without justly
incurring the reproach of violating the national faith?
Such are the origin, duration, extent and sanctions of the policy
which we are now called upon to subvert. Its beneficial effects,
although they may vary in degree, have been felt in all parts of the
Union. To none, I verily believe, has it been prejudicial. In the North,
every where, testimonials are borne to the high prosperity which it
has diffused. There, all branches of industry are animated and
flourishing. Commerce, foreign and domestic, active; cities and
towns springing up, enlarging and beautifying; navigation fully and

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Principles of Macroeconomics 6th

Edition Mankiw Solutions Manual

WHAT’S NEW IN THE SIXTH EDITION?

By the end of this chapter, students should understand:

➢ how economic growth differs around the world.

➢ why productivity is the key determinant of a country’s standard of living.

➢ the factors that determine a country’s productivity.

➢ how a country’s policies influence its productivity growth.

WHY IS THIS CHAPTER IMPORTANT TO STUDENTS?

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IF NOTHING ELSE, MY STUDENTS SHOULD LEARN…

WHAT CAN I DO IN CLASS?

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B. FYI: Are You Richer Than the Richest American?

II. Productivity: Its Role and Determinants

A. Why Productivity Is So Important

1. Example: Robinson Crusoe

b. His standard of living depends on his ability to produce goods and

2. Definition of productivity: the quantity of goods and services produced

3. Review of Principle #8: A Country’s Standard of Living Depends on Its Ability to

B. How Productivity Is Determined

1. Physical Capital per Worker

a. Definition of physical capital: the stock of equipment and

2. Human Capital per Worker

a. Definition of human capital: the knowledge and skills that

3. Natural Resources per Worker

a. Definition of natural resources: the inputs into the production of

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c. Case Study: Are Natural Resources A Limit To Growth? This section

a. Definition of technological knowledge: society’s understanding of

Activity 1—The Universal Replicator

Type: In-class assignment

Common Answers and Points for Discussion

2. What jobs would not be needed?

3. What would happen to the price of goods?

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4. What kinds of problems would you expect?

5. What benefits do you see?

6. What kinds of jobs would still be necessary?

As agricultural and manufacturing employment decline, we find more workers in the

C. FYI: The Production Function

1. A production function describes the relationship between the quantity of inputs

2. The production function generally is written like this:

where Y = output, L = quantity of labour, K = quantity of physical capital, H =

3. Many production functions have a property called constant returns to scale.

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b. This implies that the following must be true:

x Y = A F(xL, xK, xH, xN)

where x =2 if inputs are doubled.

Y/L = A F(1, K/L, H/L, N/L)

III. Economic Growth and Public Policy

A. The Importance of Saving and Investment

1. Because capital is a produced factor of production, a society can change the

2. However, there is an opportunity cost of doing so; if resources are used to

B. Diminishing Returns and the Catch-Up Effect

1. Definition of diminishing returns: the property whereby the benefit from

b. Thus, if workers already have a large amount of capital to work with,

c. In the long run, a higher saving rate leads to a higher level of

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2. An important implication of diminishing returns is the catch-up effect.

a. Definition of catch-up effect: the property whereby countries that

C. Investment from Abroad

2. Investment in the country by foreigners can also occur.