FFF: How Trade Wars Shaped Early American History

Future of Freedom, June 2014

How Trade Wars Shaped Early American History, Part 1

by James Bovard

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.”

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.”

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.”

“The American system”

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 paved 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.”