Mises Daily Articles
Free Trade and the American Political Tradition
[First published April 20, 2005.]
Politics, like war, robs words of their meaning. This is especially true of the language of economics. For example, economists know what investment means and that it's good for the economy; but the government uses investment to mean its profligate spending projects which are, of course, harmful to the economy. In 18th century America, people knew what was meant by the word rights. When Thomas Jefferson and others used it, it meant limitations on government power. In today's America, however, the word rights has become synonymous with government power, as in my right to a job or your right to health care.
So it is with the phrase free trade. Politics, and in particular that most concentrated form of politics -- war, have muddled its meaning. In the 18th and 19th centuries, the term described the economic regime under which people can buy and sell across the borders without penalty from the government. The case for free trade was the case for free markets. When the government interferes in the freedom to contract, it benefits some (powerful special interests) at the expense of others -- that is the people. Under free trade, on the other hand, the general good is served.
Originally free trade was not like mercantilism, where the government monopolizes and otherwise hinders the right to trade across borders. Free trade was not like an export policy where domestic producers are subsidized so they can push their goods on unwilling consumers abroad. Free trade was not like a producer policy where large producers conspire with the government to decide what goods will be allowed to cross borders. Free trade was not like an industrial policy where large corporations are given investment guarantees in the disguised form of aid to foreign regimes. Free trade was not like imperialism where a more powerful government imposes its will on a less powerful one through intimidation and force. Free trade was an ideal that grew out of the vision of liberty.
The same freedom that governs the market at home, its proponents believed, ought to govern trade across borders. Just as private parties negotiate their contracts for their goods and services at home, they would do so abroad. In the 18th and 19th century, to be a free trader meant to apply pressure to try to bring about this ideal through intellectual persuasion and political lobbying. Free traders brought that pressure to bear against their own government. That was where their moral obligation began and ended.
What about the term protectionism? It meant government manipulation of trade on behalf of particular interest groups. Governments can do this alone by erecting tariffs, quotas, and sanctions. Governments can engage in protectionism in cahoots with other governments as we see in regional trade agreements such as the EU or Nafta. However it is achieved, protectionism constitutes intervention in the natural order of liberty. To be consistent with history and theory, people who claim to favor free trade should be agitating against the US's protectionist policies and US support of the protectionist policies of others, not pushing for trade blocs or war to open markets. These policies are mercantilist because they exalt the right of government to hinder trade. They support an export-driven policy under which producers are subsidized. They embody industrial policy where large corporations are paid off; they are imperialistic with regulations on labor and the environment to be harmonized across borders.
The Post-War Planning Regime
How did this all begin? When did free trade come to mean its opposite? As with so much else, it was the Second World War that changed everything. The trust and deference that the American people gave the government during the war spilled over to the post-war plans for carving up the spoils. At the Bretton Woods conference in 1944, trade came to mean investment guarantees and global bureaucracies in statist treaties between governments. This was central planning exalted to new heights.
As F.A. Hayek wrote in the neglected conclusion to his 1944 book The Road to Serfdom, "If international economic relations, instead of being between individuals, become relations between whole nations organized as trading bodies, they will inevitably become the source of friction and envy." Ludwig von Mises concluded in his 1944 book Omnipotent Government: The Rise of the Total State of Total War with a similar warning. "The establishment," he said, "of an international body for foreign trade planning will end in hyperprotectionism." These two great free marketeers understood how government uses the period immediately following a war as it does the war itself for state power and special-interest rewards.
The Wilson administration attempted this after the First World War. An early draft of the League of Nations treaty included a world trade tribunal. After the Second World War, Mises and Hayek did not want such a thing to be imposed on us. Instead they wanted to recreate the 19th century ideal. And thanks to the work of Mises and other partisans of the free market, when the Truman administration emerged from negotiations in Havana with something called the International Trade Organization, free market advocates were ready. We had had the World Bank and the International Monetary Fund foisted on us, but free traders did stop the ITO
The lobbying efforts of Phillip Courtney under the influence of Henry Hazlitt proved definitive. In his book, The Economic Munich, Courtney explained the dangers of turning over trade policy to an international body. "In the long run," he said, "a centralized trade authority will globalize protectionism." Courtney cited the charter of the International Trade Organization to make his point. It endorsed demand-side management and full-employment policies, which Courtney rightly regarded as code words for government planning. Thanks to such intellectual leaders and the Old Right in Congress, the ITO went down to defeat.
Of course, during the debates, the elites never missed a chance to smear the ITO opponents; and the language of trade was permanently subverted. Advocates of global bureaucracies began calling themselves free traders. The ITO, they said, would save free trade from itself just as the New Deal had saved capitalism from itself. The opponents of world bureaucracies, no matter how much they favored free trade, were called isolationists and protectionists -- words drawn from recent war propaganda. As true believers in trade, the Old Right would not accept the term isolationist. And as opponents of mercantilism, of course, they rejected the word protectionist.
Free Trade and Decentralization
Centralizing bodies managing trade are, of course, not compatible with self-determination, even if erected in the name of free trade. In holding this view, the Old Right was in a great American tradition: Southern free traders from Jefferson to Calhoun. The tradition was based on a hard-nosed understanding of the nature of power and a devotion of federalism and local control. When power is centralized, they argued, it expands and will be used against the people. The best way to limit power is to limit centralization. For example, it is in the economic interest of smaller political units to maintain open trading relationships. The larger the political unit, as Hans-Hermann Hoppe has shown, the more enlightening a policy of autarchy can appear. The Southern free traders linked their economic doctrine with states rights as embodied in the Constitution and with a non-interventionist foreign policy and severe limitations on what they call consolidation, that is centralization.
These ideas melded on a theoretical level because they speak to the right of individuals and communities to be free of an arbitrary powers of distant rulers. Among the reasons the Declaration of Independence gave for overthrowing King George III was that he was "cutting off our trade with all parts of the world." Jefferson presents a more elaborate argument in his 1774 essay Summary View of the Rights of British America. The outrages of the Sugar Act and the Townsend Duties demonstrated that Britain was willing to use coercion to deny Americans the liberty to trade -- meaning to buy, to sell to anyone that they pleased.
Jefferson regarded this as the essence of tyranny intolerable enough to warrant a violent overthrow of the government. "Single acts of tyranny may be ascribed to the accidental opinion of the day," he wrote in 1774, "but a series of repressions begun in a distinguished period and pursued unalterably through every change of ministers plainly prove the deliberate systematical plan of reducing us to slavery." To ensure the right of trade among other rights, the founders established, not a central government, but a federal one. It was a union among states, and these individual states would protect the people against the centralization of power by jealously guarding states rights and privileges.
Trade became an issue again in the debates of the Constitution, however. The so-called federalists, actually the centralizers, accused the states of erecting barriers to trade under the Articles of Confederation. This was among the most serious accusations that could be made. It implied that the states were doing to each other what King George had done to America. The Federalists argued that the Constitution was necessary to bring about free trade among the states. In particular, they argued, the commerce clause would be the essential guarantee of a free flow of goods. The anti-federalists, really the anti-centralists -- official monikers being a prime example of the misuse of language -- countered that the commerce clause conflicted with another valued precept of American liberty, that is states rights.
The anti-federalists warned that the freedom of trade, like all freedoms, was best protected by the de-centralized Articles of Confederation or something similar rather than by a new central government with central powers, especially the power to conduct trade policy. The anti-federalists argued that this clause could, and therefore, would be abused to the advantage of one sector as opposed to another. But the Constitution passed upon James Madison's promise that this would never be so. "The commerce clause," he said, "would forever be used to protect the liberty of every American to trade in an unhindered way just as every other American."
Of course, history did not turn out that way. After the overthrow of the king, the partisans of Northern industrial and banking interests began agitating to abandon the principles of the Declaration. The Hamiltonians wanted the powers of King George to be exercised by the President in violation of the principles agreed upon in the Constitution. Their goal was the enrichment of special interests --manufacturing and banking -- at the expense of the Southern states. The great statesmen of the first half of the 19th century, free traders to a man, were devoted to stopping the Hamiltonian power policy of executive power, entangling alliances and war, taxes and protectionism to benefit northern elites.
The old Republicans wanted the political victory of 1800 used to roll back the centralizing that had taken place since 1787. Their goal was to secure a permanent victory over the Hamiltonians who were both pro-state and pro-war as well as pro-tariff.
Among the greatest of the Southern republicans was John Randolph of Roanoke -- the aristocratic libertarian. He said, "Let us adhere to the policy laid down by the second, as well as by the first, founder of our republic. By the Camillus as well as the Romulus of the infant state to the policy of peace, commerce, and on friendship of all nations entangling alliances with none." He was among the earliest and most hard-core of the anti-protectionists of the Old South. His reasons were part philosophical, part economic, and part political. As a partisan of states' rights, he saw no justification for granting an external power the right to interfere with commerce and the use of private property; yet Randolph was also a centralist of a particularly American sort. "When I speak of my country," he wrote John Brockenborough, "I mean the commonwealth of Virginia. I was born in an allegiance to George III. My ancestors threw off the oppressive yolk of the mother country, but they never made me subject to the New England in the matters spiritual or temporal neither do I mean to become so voluntarily."
Another great old Republican was John Taylor of Caroline. He was not only a brilliant political philosopher; he led the opposition to the Northern protective tariff. "Give us a free and open competition in our own market," he said, "and we fear not to encounter like competition in the general market of the world." Taylor saw the tariff as part of the apparatus of statist domination. The interest groups behind it were northern industrialists who wanted to feed their private greed at public expense. Rather than selling their wares on a level playing field of free competition, they sought government privilege. In 1821 the Congressional Committee of Manufacturers issued a report calling for protective tariffs to expand industry. In today's language they called this growing the economy, expanding trade, enacting fair trade, or any of another number of other chivalrous used to centralize trade authority. But Taylor saw the real motive of tariffs. They were a power grab.
But the manufacturers sought to gain what come at the South's expense in two respects. First, economically, the tariff harmed agriculture and transferred wealth. Second, politically it was contrary to the free trade sentiments of the Old South, and it subverted Southern rights of political self-determination and was, therefore, a violation of the original federal compact.
Taylor was a lover of peace so the industrialists were his natural enemies. As is so often the case, the pro-tariff party was also the pro-war party. The industrialists favored Hamilton's attempt to ferment a war with France to enhance the Executive. Taylor noted that the industrialists' 1821 report complained that, "We flourished in war and are depressed in peace because manufacturers then flourished and now are depressed." They hoped that the tariffs would similarly enhance their profits, if only today's war and tariff party were half that honest. Taylor responded as follows:
"They say," he said, "we flourished in war. Who are we? Not the people of the states generally. They were loaded with taxes, deprived of commerce, and involved in debt. The families, which flourished in war, were the contracting and industrialist families, the latter by loans and premiums and the selling the wares of their factories at the profit of 50 or 100 per centum. Had the great family of the people flourished," said Taylor, "they would not have failed peace and trade."
The industrialists wanted to revive what Taylor had called the "property transferring policy which transferred the operated so delightfully in war." Taylor said, "It is a consequence of war to transfer property. And this is hitherto been considered one of its evils." But the Northern industrialists wanted to redefine redistribution as a virtue of war for themselves on the receiving end of the loot, of course.
A third great Old South free trade theorist was John C. Calhoun. He, too, denounced the tariff imposed by the Northern usurpers. "By a perversion of the powers of the Constitution, which was intended to protect the states of the Union in enjoyment of their natural advantages, they have stripped us of the blessings bestowed by nature and converted them to their own advantage. Restore our advantages by giving us free trade with the world, and we would become what they are now by our own means -- the most flourishing people on the globe." In contrasting himself with his opponents, Calhoun said, "We want free trade, they restrictions. We want moderate taxes, frugality in the government, economic accountability, and a rigid application of the public money to the payment of debt." Calhoun granted that the Constitution allowed the central government to oppose a duty on imports for revenue purposes, but his analysis of power politics led him to believe that more was involved. Neither the tax imposed nor the revenue collected were being used for the general interest. They were being used by one group to destroy another. The tariff, therefore, violated the Constitution by benefiting one group at the expense of another without the exploited group's consent.
Calhoun was, in addition to all of his other achievements, an impressive economist theorist. He defended free trade as necessary to the division of labor. As he explained the South has "from soil and climate, a facility in rearing certain great agricultural staples. While other and older countries with dense population and capital greatly accumulated have equal facility in manufacturing various articles suited to our use. And thus a foundation is laid for an exchange of the products of labor mutually advantageous."
The tariff, he argued, acted as a tax on his trade. And a tax hurts the producer, he said, whether it is laid on the vender or the purchaser. It doesn't matter whether the tax is a consumption tax or a production tax. In the end it hurts production because, he said, the tax must always eat into profits and therefore future capital. "The effect on us," he wrote, "is to compel us to purchase at a higher price both what we obtain from them and from others without receiving a corresponding increase in the price of what we sell."
Calhoun developed a unique way of thinking about the tariff that turned it into a populist issue. If the tariff is one third, it is the same as the government taking one third of what the producers raise in cotton, rice, and tobacco. Whether the goods are coming into the country or leaving it, a tariff of one third is the theft of one third. To Calhoun this meant that one third of the toil and labor of the people of the South was being transferred to the North to build Northern industry and to feed a hostile government. "We are the serfs of the system" he announced, "out of whose labor is raised, not only the money paid into the Treasury, but the funds out of which are drawn the rich rewards of the manufacturer associates and interests. Their encouragement is our discouragement." The survival of the South is at stake in this issue, he said.
"The last remains of our great and once flourishing agriculture must be annihilated in the conflict. In the first instance, we will be thrown on the home market which can not consume a fourth of our products; and instead of supplying the world as we would with free trade, we would be compelled to abandon the cultivation of three fourths of what we now raise and receive for the residue whatever the manufacturers, who would then have their policy consummated by the entire possession of our market, might choose to give."
Free-trade, Calhoun believed, represented the ultimate safeguard of political rights. Without such trade, the South would become a captive nation, enserfed for a cabal of Northern industrialists tied to and dependent upon government power. His solution, of course, was to insert the right of interposition whereby South Carolina would stand as a buffer between the individual and the central government. To protect the Constitution, that is, Calhoun advocated disobedience to central government. That's a sound principle.
Let's compare Calhoun's arguments against the tariff of abominations with Jefferson's summary view. Both argued against violations of free trade. Both argued against a centralized government. Both argued that tariffs were taxation without representation. Both argued that this is tyranny, and both argued that radical means were justified in overthrowing the oppressor. This is one of the reasons that the founding fathers of the Confederacy felt themselves to be the heirs of the original founders. Tariff taxes precipitated both independence movements, and both were based on the view that liberty and free trade were of a piece. If Randolph, Taylor, Calhoun, and all their followers had been able to appeal the tariffs and prevent their re-imposition, the war between the states might never have occurred. So many young men might never have died, and our nation might still be free.
Instead, after a reprieve in 1833, the central government engaged in more and more trade protectionism and centralized tyranny, which helped lead to war. In his seldom quoted first inaugural address, Abraham Lincoln pledged, "no bloodshed or violence", but he also promised to "collect the duties in the impost no matter what". He effectively announced that he planned to tax the South to death; and as soon as he was able to do so, Lincoln imposed the highest tariff in US history doubling the rates to 48%.
At the beginning of the war, a revealing Boston newspaper editorial accused the South of the gravest crime of all, which the editorialist called the cause of the war. The South, said the editorial wanted a system "verging on free trade. If the Southern Confederation is allowed to carry out a policy by which only a nominal duty is laid upon import, no doubt, the business of the chief Northern cities will be seriously injured." Alas, the South was not allowed to carry out its policy of free trade, and the nation paid a terrible price.
It is a price that we are still paying, and we are repeating the same errors with regard to current trade policy. Despite the rhetoric we hear from Washington, there is no threat that free trade is going to break out anytime soon. A true regime of free trade, as Murray Rothbard has pointed out, would be greeted by Washington, DC, with about the same enthusiasm as the repeal of the income tax.
Jefferson, Taylor, Randolph, and Calhoun were right. Centralized government is the tyrant, we are its serfs. These free trade revolutionaries found the remedy of tyranny as serfdom and a love of liberty and a willingness to fight for independence. Like Mises writing in his 1919 work Nation, State and Economy, they believed that "no people or part of a people should be held against its will in a political association that it does not want."
For Jefferson, Randolph, Taylor, and Calhoun, the cause of independence was the force powerful enough to rally the public against distant rulers. But their desire for independence was not, of course, directed against any other country, and free trade was a key to this. As Calhoun said when he wrote to the Manchester Anti-Corn Law League in 1845, "I regard free trade as involving considerations far higher than mere commercial advantages as great as they are. It is, in my opinion, emphatically the cause of civilization and peace."
But, civilization and peace are threatened. In Jefferson's day the tyranny was centered in the British Crown. In our day the tyranny is centered in Washington, DC, in New York, Geneva, and Brussels. If we are to restore liberty, free enterprise, and free trade, we must begin by understanding the power that genuine economic globalism and an old-fashioned devotion to political independence will have in uniting us against the forces of despotism. We can be both trade globalists and political localists. Indeed, this is precisely what the best of the American tradition holds out as an ideal.