The Civil War revolutionized the financial methods of the United States. A new monetary system was created, and tax resources before undreamed of were resorted to, at first timorously, in the end with a rigor that hardly knew bounds. The tariff, which had long been the sole source of federal income, was supplemented by a series of extraordinary internal taxes, and was itself called on to yield more revenue and still more.
When the Civil War closed, the revenue acts that had been hastily passed during its course constituted a chaotic mass. Congress and the secretary of the treasury immediately set to work to bring some order into this chaos, by funding and consolidating the debt, by contracting the paper currency, and by reforming and reducing the internal taxes.1
The years between 1865 and 1870 are full of discussions and enactments on taxation and finance. On some parts of the financial system, in regard to which there was little disagreement, action was prompt and salutary. The complicated mass of internal taxes was felt to be an evil by all. It bore heavily and vexatiously on the people; and Congress proceeded to sweep it away with all possible speed.
As soon as the immense floating debt had been funded, and the extent of the annual needs of the government became somewhat clear, Congress set to work at repealing and modifying the excise laws. It is not necessary to enumerate the various steps by which the internal-tax system was modified. Year after year acts for reducing and abolishing internal taxes were passed. By 1872 all those which had any connection with the subject of our investigation — the protective duties — had disappeared.2
The taxes on spirits and beer, those on banks, and a few comparatively unimportant taxes on matches, patent medicines, and other articles were retained. But all those taxes which bore heavily on the productive resources of the country — those taxes in compensation for which higher duties had been imposed in 1862 and 1864 — were entirely abolished.
Step by step with this removal of the internal taxes, a reduction of import duties should have taken place; at the least, a reduction which would have taken off those additional duties that had been put on in order to offset the internal taxes. This, however, Congress hesitated to undertake.
We have seen that the opportunity given by the war system of taxation was seized by the protectionists in order to carry out their wishes. It would not be easy to say whether at the time the public men who carried out this legislation meant the new system of import duties to be permanent. Certainly the war methods of finance as a whole were not meant to remain in force for an unlimited time. Some parts of the tariff were beyond doubt intended to be merely temporary; and the reasonable expectation was that the protective duties would sooner or later be overhauled and reduced.
Had the question been directly put to almost any public man whether the tariff system of the war was to be continued, the answer would certainly have been in the negative, that in due time the import duties were to be lowered.3
During the years of confusion immediately after the war, little was attempted; but soon a disposition to affect some reform in the incongruous mass of duties began to be shown. Each year schemes for reduction and reform were brought forward. Commissions were appointed, bills were elaborated and considered; but the reform was put off from year to year.
The pressure from the interested domestic producers was strong; the power of the lobby was great; the overshadowing problem of reconstruction absorbed the energies of Congress.
Gradually, as the organization of industry in the country adapted itself more closely to the tariff as it was, the feeling that no reform was needed obtained a stronghold. Many industries had grown up, or had been greatly extended, under the influence of the war legislation.
As that legislation continued unchanged, still more capital was embarked in establishments whose existence or prosperity was in some degree dependent on its maintenance. All who were connected with establishments of this kind asserted that they would be ruined by any change.
The business world in general tends to be favorable to the maintenance of things as they are. The country at large, and especially those parts of it in which the protected industries were concentrated, began to look on the existing state of things as permanent. The extreme protective system, which had been at the first a temporary expedient for aiding in the struggle for the Union, adopted hastily and without any thought of deliberation, gradually became accepted as a permanent institution.
From this it was at short step, in order to explain and justify the existing state of things, to set up high protection as a theory and a dogma. The restraint of trade with foreign countries by means of import duties of 40, 50, 60, and even 100 percent came to be advocated as a good thing in itself by many who, under normal circumstances, would have thought such a policy preposterous."Tariffs were no longer the exploded errors of a small school of economists; they became the foundation of the policy of a great people."
Ideas of this kind were no longer the exploded errors of a small school of economists; they became the foundation of the policy of a great people. Then the mass of restrictive legislation that had been hurriedly piled up during the war was strengthened and completed, and made into a firm and consistent edifice. On purely revenue articles, such as are not produced at all in the country, the duties were almost entirely abolished.
A few raw materials, it is true, were admitted at low rates, or entirely free of duty. But these were exceptions, made apparently by accident. As a rule, the duties on articles produced in the country, that is, the protective duties, were retained at the war figures, or raised above them.
The result was that the tariff gradually became exclusively and distinctly a protective measure; it included almost all the protective duties put on during the war, added many more to them, and no longer contained the purely revenue duties of the war.
This article is excerpted from part II, chapters 1 and 2 of The Tariff History of the United States (1888, newly republished by the Mises Institute in 2010).
- 1. Those who wish to get some knowledge of the confused character of the financial legislation called out by the war are referred to Mr. David A. Wels's excellent essay on "The Recent Financial Experiences of the United States" (1872). Those who wish to study more in detail the course of events after the war should read Mr. Wells's reports as Commissioner of the Revenue, of 1867, 1868, 1869, and 1870.
- 2. The most important acts for reducing the internal taxes were those of July 11, 1866; March 2, 1867; March 31, 1868; July 14, 1870; and June 6, 1872.
- 3. As late as 1870, Mr. Morrill said: "For revenue purposes, and not solely for protection, fifty per cent in many instances has been added to the tariff [during the war] to enable our home trade to bear the new but indispensable burdens of internal taxation. Already we have relinquished most of such taxes. So far, then, as protection is concerned … we might safely remit a percentage of the tariff on a considerable share of our foreign importations. … It is a mistake of the friends of a sound tariff to insist on the extreme roles imposed during the war, if less will raise the necessary revenue. … Whatever percentage of duties was imposed on foreign goods to cover internal taxation on home manufactures, should not now be claimed as the lawful prize of protection, when such taxes have been repealed. There is no longer an equivalent." Congress, Globe, 1869–70, p. 3295. These passages occur at the end of a long speech in favor of the principle of protection.
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