Mises Daily

American Tariffs and Wars From the Revolution to the Depression

Fair trade is once again a rallying cry for many Americans. Many contemporary leftists believe that the U.S. government should impose restrictions or tariffs on imported goods that are alleged to have been produced by underpaid or oppressed Third World workers. Few contemporary protectionists are aware of the sordid history of trade conflicts earlier in American history.

Restrictive trade policies were a major cause of the American Revolution. “In 1732, England slapped heavy duties on American pig iron, and, in a death blow to the hat industry, decreed that hat makers were forbidden to have more than two apprentices each,” as an 1892 Stanford University monograph noted. In 1750 Britain prohibited Americans from erecting any mill for rolling or slitting iron; William Pitt exclaimed, “It is forbidden to make even a nail for a horseshoe.” The Declaration of Independence denounced King George for “cutting off our trade with all parts of the world.” Many Founding Fathers recognized the corrupt nature of such restrictions. Benjamin Franklin observed, “Most of the statutes or acts, edicts, arrests, and placarts of parliaments, princes, and states, for regulating, directing, or restraining trade, have been either political blunders, or jobs obtained by artful men for private advantage, under pretense of public good.”

Tariffs and Embargoes in the New United States

The first Congress under the Constitution passed a new tariff in 1789 with an ad valorem rate of 8 percent; the entire tariff code consisted of a single sheet of rates posted at U.S. custom houses. (By the 1980s, the tariff code would fill two hefty volumes with more than 8,000 different categories.) While the 1789 tariff seemed high to many Americans at the time, the tariff levels would continue rising and reach triple that level by 1816.

In 1791 Secretary of the Treasury Alexander Hamilton issued “Report on Manufacturers,” in which he sought to persuade Americans to support high tariffs for infant industries to spur economic development: “Though it were true, that the immediate and certain effect of regulations controlling the competition of foreign with domestic fabrics was an increase of price, it is universally true, that the contrary is the ultimate effect with every successful manufacture. ... In a national view, a temporary enhancement of price must always be well compensated by a permanent reduction of it.” Hamilton neglected to explain why higher prices always lead to lower prices, but that did not deter subsequent generations of protectionists from invoking him as if his report had been handed down from Mount Sinai.

As the 1800s began, the United States’s trade was rollicked by the competing embargoes imposed on European trade by Britain and by Napoleon in France. In response to British attacks on American ships, Thomas Jefferson imposed a temporary embargo on trade with England in 1807. Inefficient American manufacturers loved the boycott and also profited heavily from the War of 1812. After that war ended, the northern part of the United States was permeated by “mushroom industries” — businesses that had thrived only because they were sheltered from foreign competition. To protect the new companies, Congress enacted a tariff in 1816 that was far higher than any prior import barrier.

The profits for factory owners generated by that tariff helped spur more pro-tariff propaganda in Washington. Northern congressmen began to advocate a ban on importing any product that any American chose to manufacture. Southern farmers, whose cotton and tobacco were the prime exports of the nation, were forced to buy in a protected market and sell in a free market. Even before the doctrines of David Ricardo reached America, Virginian farmers were protesting to Congress that government policy should not scorn a nation’s comparative advantage: “That instead of struggling against the dictates of reason and nature, and madly attempting to produce every thing at home, countries should study to direct their labors to those departments of industry for which their situation and circumstances are best adopted.”

The Tariff of Abominations and More

In 1821 a congressional Committee on Manufactures released a report asserting “that commerce is exporting, not importing,” and “the excess of exports over imports is the rate of profit.” Tariff proposals were widely seen as a way to enrich the North at the expense of the South. The committee easily got rid of this objection: “The committee thus publicly declare, that if the proposed tariff had, in their opinion partaken of the character imputed to it, it would not have received their sanction; this House certainly would withhold theirs.” The committee recommended blind faith in the (future) generosity of factory owners: “It is a fact, which cannot be too often repeated, which has been verified by every experience, confirmed on every trial, that, when the domestic market has been secured to the domestic manufacturer, domestic competition has reduced the price to the consumer.”

Sen. John Taylor of Virginia, in a fiery reply to the congressional report entitled Tyranny Unmasked, warned, “The Committee have entirely overlooked by far the most important branch of political economy, namely, the economy which teaches nations not to expend the principles which secure their liberty, in search of money. ... How could it happen that exchanges of property with foreigners should ruin us, but that transfers of property to capitalists should do us no harm?” Taylor had a far better grasp of economic history than did the congressional committee: “In the history of the world, there is no instance of a political economy bottomed upon exclusive privileges, having made any compensation for the deprivation it inflicts.”

Early Americans recognized the issue of principle in trade restrictions far more clearly than did their successors. A Committee of the Citizens of Boston warned in 1827, “Let it never be forgotten, that the question ... is not so much what may be beneficial to manufacturers, as whether government has a right to benefit these, to the manifest injury both of the agricultural and commercial classes.” Sen. Daniel Webster of Massachusetts was one of the most eloquent opponents of trade barriers. He derided protectionism as “a policy which no nation had entered upon and pursued without having found it to be a policy which could not be followed without great national injury, nor abandoned without extensive individual ruin.”

Sugar tariffs were one of the heaviest burdens on American consumers in the 1820s. After 1816, tariff hikes drove U.S. sugar prices to more than double the world price. Sugar farmers in Louisiana petitioned Washington to maintain the tariff, claiming that they needed government help in their “war with nature” trying to produce sugar in a climate not ideally suited to it. One Southern politician warned that dropping sugar tariffs could inflict widespread collateral damage because “the ruin of the sugar planters would depreciate slave property in the United States by $100,000,000.”

Wool was the item that received the most attention from the early American protectionists. The main reason for Congress’s obsession to protect wool — one of the most primitive industries — was the pervasive distribution of sheep among congressional districts. In the 1820s wool cost twice as much in the United States as in Britain. As the 1892 Stanford study noted, “Even though the tariff was up to 150% on some wool products, one-third of wool supply still came from abroad. Naturally, the tariffs were carefully designed so that the tariffs were far higher in the lowest-quality clothing than on the highest-quality clothing; this allowed the poorest citizens to best partake of the benefits of ‘the American system.’” By the late 1820s, the wool lobby was infesting Washington, wailing about a supposed epidemic of smuggling of clothes across the national borders.

In 1828 Congress passed the “Tariff of Abominations” — a crushing, heavy tariff that explicitly sacrificed one part of the country to another part. Northern manufacturers got almost all the benefits of protection, while Southern farmers were forced to pay higher prices for comparatively inferior American products and lost their cotton export markets because of foreign retaliation against the United States.

In 1832 Congress upped the tariffs still higher. South Carolina declared the new tariff unconstitutional and thereby null — and busied itself buying cannon and signing up volunteers to defend its state’s rights. Congress backed down and lowered the tariffs, but the clash bitterly alienated the North and South and helped pave the way for the Civil War.

Protectionists had long insisted that sagacious government restrictions could speed the development of the American economy. But some of the tariffs that Congress imposed actually subverted industrial development. Prior to the Revolution, American iron manufacturers had been competitive with foreign products. But after Congress imposed a high tariff on iron imports, U.S. producers sharply raised their prices. Former Treasury Secretary Albert Gallatin, in an 1832 report, condemned “the injustice and mischievous effects of an exaggerated duty on an article of such general use as iron. It falls upon the farmer, the mechanic, the shipping interest, and on every branch of the iron manufacture, those few excepted which have been embraced by the partial protecting system.”

In 1845 the Democrats took over the White House and began working for tariff reduction. Secretary of the Treasury Robert Walker issued a report in 1845 on the nature and effects of the tariff, observing, “At least two-thirds of the taxes imposed by the present tariff are paid, not into the treasury but to the protected classes. ... [The tariff] is too unequal, and unjust, too exorbitant and oppressive, and too clearly in conflict with the fundamental principles of the Constitution.” Walker concluded, “If England would now repeal her duties upon our wheat, flour, Indian corn, and other agricultural products, our own restrictive system would certainly be doomed to overthrow.” Walker assumed this because American protectionists had eternally pointed to English trade barriers to justify the perpetuation of high American tariffs. In 1846 the British repealed almost all tariffs on agricultural products. Yet American protectionists were not satisfied, and quickly invented new reasons that the United States should have high tariffs. For the next 40 years, anyone who advocated free trade was loudly accused of having taken “British gold.”

Tariffs and the Civil War

But in the late 1840s a series of tariffs were slashed. The 1850s, an era of low tariffs, was widely recognized as by far the most prosperous era in American history to that point. However, the rise of the Republican Party would soon put an end to such policies. Abraham Lincoln campaigned on a promise to boost tariffs — a key factor in helping him carry Pennsylvania and win the presidency in 1860. But Lincoln’s tariff agitation further alienated Southern states and convinced many Southerners that they would be sacrificial animals for Northern industrialists.

After seven Southern states seceded — over slavery — Republicans in Congress rushed to enact a prohibitive tariff bill even before Lincoln took office. A New York Times editorial on February 14, 1861, warned that boosting the tariffs as high as 216 percent could drive the border states out of the Union: “One of the strongest arguments the [seceded states] could address to [border states] would be furnished by a highly protective tariff on the part of our Government, toward which they cherish the deepest aversion.” The Times condemned the bill as a “disastrous measure” that “alienates extensive sections of the country we seek to retain” and will “deal a deadly blow … at the measures now in progress to heal our political differences.” The Times noted that “the tendency of all leading commercial nations, is unmistakably toward free trade. … We should be in a pretty fix, with free trade at every Southern port, and a prohibitory tariff at New-York, Philadelphia and Boston.” The Times’s sound arguments had no impact on the Republican stampede, and six more states seceded after the Morrill tariff bill was enacted and after Lincoln mobilized troops in response to the Fort Sumter episode.

Tariffs, Hawaii, and the Spanish-American War

Tariff fights were intense in the 1880s, producing some of the best analysis of the folly before or since. Rep. Frank H. Hurd declared in 1881, “It is beyond the sphere of true governmental power to tax one man to help the business of another. … This is robbery, nothing more nor less.” And there was no reason to expect benevolent guidance. Economist Henry George observed,

To introduce a tariff bill into Congress is like throwing a banana into a cage of monkeys. No sooner is it proposed to protect one industry than all industries begin to screech and scramble for it.” Yale professor William Graham Sumner testified to the Tariff Commission in 1882, “Protective taxes have never been laid in view of any true knowledge of the industrial circumstances, and they never can be. Now, from a tangle of absurdities and contradictions, and ignorances, and guesses, it is expected that guidance will come which shall lead the American producer to a better organization of industry than he could arrive at if left alone, so that greater accommodation of capital and larger wages would follow.

Rather than boosting American manufacturing across the board, the high tariffs of the 1880s sacrificed some industries to others. As Henry George noted, “Thus iron ore has been protected despite the fact that American steel-makers need foreign ore to mix with American ore, and are obliged to import it even under the high duty. Thus copper ore has been protected, to the disadvantage of American smelters, as well as of all the many branches of manufacture into which copper enters. Thus lumber has been protected in spite of its importance in manufacturing as well as of the protests of all who have inquired into the consequences of the rapid clearing of our natural woodlands. Thus coal has been protected, though to many branches of manufacturing cheap fuel is of first importance.”

High tariffs in the 1880s were widely recognized as a ball and chain on American exports. As Jacob Schoenhof observed in his 1885 book, The Destructive Influence of the Tariff, “The word ‘Protection’ presupposes the existence of a foreign power against which protection is desired. Excepting Spain, perhaps, it is only the United States, who in spite of the experience of other nations, maintain that a Chinese wall [of high tariffs] is necessary to the well-being and happiness of her people.” Schoenhof pointed out the adverse impacts of trade barriers: “It is the nature of all protection that it either stimulates over-production or invites to indolence, carelessness, and neglect.” He pointed out a basic truth that congressional policymakers perennially ignored: “Protection of industries and [import] taxes on raw materials cannot coexist.”

In his influential “Report on Manufacturers,” Treasury Secretary Alexander Hamilton had promised that a short period of protection for infant industries would result in higher industrial productivity that would soon deliver a bounty of lower prices to consumers. By the 1890s, protectionists were using a far different argument, claiming that it was unfair for American producers to have to compete with foreign producers who had any cost advantage whatsoever. The House Ways and Means report on the McKinley Tariff of 1890 proclaimed an ideal of equalizing domestic and foreign costs of production. Yet that standard never made any sense.

A 1908 congressional investigation of the paper industry concluded, “The difference in the cost of production between up-to-date, well-located plants and inefficient, badly-located plants in this country, was greater than the difference between efficient plants here and efficient plants abroad.” The tariff code had “evolved” from a way to provide future benefits to consumers into a means to provide unlimited and permanent protection to producers, regardless of their efficiency, competence, or greed. Tariffs from 1890 onwards were based on the principle that any foreign advantage was inherently unfair.

The McKinley Tariff of 1890 also helped drag the nation into war later that decade. As John Dobson explained in his 1976 book, Two Centuries of Tariffs: The Background and Emergence of the U.S. International Trade Commission,

When William McKinley was drafting his sweepingly protective revision of the tariff schedules in 1890, he realized that some sources of the surplus revenue would have to be eliminated in order to justify raising other rates. For this and other reasons, sugar ended up on the free list, effectively reducing the income from customs duties by approximately $50 million to $60 million a year. ... In order not to leave U.S. producers without a competitive advantage, the act authorized the Government to pay them a 2 cent per pound bounty on their production. … When the Democrats revised the tariff 4 years later, they restored a portion of the old duty on sugar and dropped the bounty. Then in 1897, the Republicans restored the bounty, but did not eliminate the duty.

Because planters in the Kingdom of Hawaii could not profitably export sugar to the U.S. market over post–Civil War tariff rates, the Royal Government finally succeeded in negotiating a reciprocal trade agreement in 1875 that allowed Hawaiian sugar to enter the U.S. without being taxed. In return, Hawaii reduced or eliminated taxes on certain U.S. goods it purchased. The U.S.-Hawaiian reciprocal trade agreement made sugar growing tremendously profitable in the islands, and U.S. planters or planters of U.S. descent settled in the islands and cultivated huge tracts of land, importing thousands of Japanese and Chinese laborers to work their fields. Between 1875 and 1890, U.S. consumption of Hawaiian sugar increased over 1400 percent. Thus, the reciprocity treaty confirmed Hawaiian economic dependence on the U.S. When the 1890 McKinley Act eliminated the tariff on sugar, it effectively destroyed the reciprocity advantage Hawaii had over other tropical regions and the islands’ economy collapsed. In the ensuing economic crisis, the American planters on the islands overthrew the Hawaiian monarchy, set up a Hawaiian Republic, and sought annexation by the United States.

While the cancellation of the U.S. sugar tariff had drastically damaged Hawaii’s economy, it had benefitted the Spanish colony of Cuba enormously. The Cuban economy boomed dramatically, since Cuban sugar could now be shipped tax-free into U.S. markets. The restoration of the duty in 1894, coming on the heels of the worldwide depression of 1893, seriously damaged Cuba’s prosperity. In a few months, Cuban revolutionaries had capitalized on the discontent of the impoverished Cuban peasants and had renewed a bloody fight for independence begun 25 years before. … This conflict ultimately drew the U.S. into a war with Spain in 1898. The war, in turn, led the U.S. to establish possession of several islands in the Caribbean and the Pacific as well as triggering the annexation of Hawaii. Thus, the seemingly innocent juggling of the sugar duty had important consequences for the U.S. and for the world.

The Republicans recaptured the White House in 1896, and a big tariff increase followed in 1897. As the classical-liberal editor of The Nation, Oswald Garrison Villard, observed on the 1897 tariff, “Its effect on the American working man’s standard of living appears from the fact that in the first ten years after its enactment the price of raw materials increased 50%, and of manufactured goods 32%, while wages in more than four thousand establishments rose only 19%.”

The Reform Club of New York released a study in 1903 that showed “out of an average family expenditure of $940, no less than $111 represented the total tariff tax, and that of this $111 only $16.52 was taken by the Government, the other $94.48 passing to the Capitalists in the protected trades.”

World War I and its Aftermath

During the First World War, normal trade with Europe was cut off. As with the War of 1812, many new American industries sprang up. Naturally, since there were new industries, the nation required much higher tariffs after the war. Tariffs were raised sharply in 1921 and 1922, even though the United States had a huge trade surplus at the time. The higher tariffs bushwhacked Europeans who had borrowed billions during and after the war, practically barring them from earning dollars to pay back their debts. More than a hundred thousand Americans died in a war claimed to prevent the subjugation of Belgium, France, Britain, and other countries. Then, as soon as the troops got home, Congress worked feverishly to prevent Americans from buying Belgian, French, and British products. The Republican high-tariff policy climaxed in the Smoot-Hawley Tariff Act of 1930 — one of the primary causes of the worldwide Great Depression that helped pave the way to World War II.

The history of U.S. trade policy should vaccinate anyone against expecting visionary economic thinking from Capitol Hill. Unfortunately, most Americans are unaware of the role of U.S. trade barriers in spurring exploitation at home and conflict abroad.

This article was first published by the Future of Freedom Foundation.

Image source: iStockphoto.
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