The tariff; an interpretation of a bewildering problem

Preface

This book abounds in quotations — more than is cus¬ tomary in works of this kind — for it has seemed best to quote at length authorities of standing, and to give their arguments in their own words. It is only fair to warn the reader that, like all quotations out of their context, they may possibly fail to give an exact representation of the author’s thought. The book is also full of references to the works of economists, from Adam Smith down. Someone has suggested that references are used only to give the appearance of a greater learning than the author possesses. They are used in this work not for that pur¬ pose, but to prove that the statements made by the author are supported by the authoritv of a scholarship to which he makes no pretence.

It may possibly reassure the prospective reader if it is stated that the book contains practically no statistics or difficult mathematical demonstrations.

Had it not been for the kindly encouragement and advice of Professor Arthur H. Cole of Harvard Uni¬ versity, this book might never have been published. The author is under obligation to Dr. Edward S. Mason for his general assistance, and particularly for his aid in rearranging the material. The author also wishes to express his appreciation of the kindness of his brotherin-law, Dr. A. E. Benson, in reading over the manuscript and in making many helpful suggestions. To Mrs. R. H. Goddard the writer is indebted for her painstaking assistance in preparing this book for the printer.

vii

Contents

CHAPTER PAGE

Preface . vii

Introduction . !

Introduction

The nineteenth century witnessed many bitter and pro¬ longed controversies. Some of these were already ageworn affairs at its beginning; some, like that concerning evolution, were practically new. Many, both old and new, have been settled seemingly for all time. A war ended the irrepressible sectional conflict over slavery in America; as a result of a greater war there is a restored Poland, and agitation for home rule for Ireland is a thing of the past; and an original and extraordinary campaign won for women in England, the United States, and a number of other countries, the right to vote. Many of the old controversies, however, still rage with undiminished intensity, though more or less changed in aim and emphasis; a number have taken on entirely new aspects; and, substantially unchanged, a few continue.

Among the last is the discussion concerning the relative merits of free trade and protection. Now several hun¬ dred years old, this question is still debated very much as it has always been.1 In several ways it is unique. It was at one time on the point of settlement with a triumph for free trade; but to the surprise of many it reappeared

1 Of course, as will be shown later, there have been some changes in the forms of the arguments used.

with increased intensity in the latter part of the century, and in recent years has again become a controversial sub¬ ject in England, long — but perhaps no longer — the only free trade country in the world. But this persistency, this phoenix-like character, though notable and unusual, is not the tariff question’s chief claim to interest. The debate concerning the opposing policies of free trade and protec¬ tion is especially remarkable because of the extraordinary peculiarity of the cleavage between the advocates of these two policies. ; Nearly all professional economsits, includ¬ ing, outside of Germany at least, the great majority of those who teach political economy in the universities and colleges and most of those who, though not connected with institutions of learning, have written authoritatively on the subject, are or have been free traders; and so also have been many of the most influential and brilliant states¬ men and journalists. In short, nearly all those who should be considered as experts on the theory of international trade, or whose opinions should have special weight because of their general knowledge of the principles of economics, have stood and still stand firmly for unre¬ stricted trade between nations; though of course it must be understood that there have generally been, particularly in recent years, noteworthy exceptions. On the other hand, in most countries — until the last few years England was, and perhaps still is, an exception — nearly all practical men of affairs, those whose successful conduct of the large and intricate commercial and industrial units in which the modern world abounds entitles their opinions to respect, have been protectionists.

Perhaps no other controversy exhibits a similar inci¬ dence in the severance of opinion. In disputes concerning banking and currency questions both here and abroad,

INTRODUCTION r banker has often opposed banker, and professor of finance professor of finance. There has, to be sure, not always been unanimity of opinion among the theoretical and practical experts; however, not only have they agreed substantially on fundamentals, but what differences of opinion have arisen have generally produced a division which had no relation to the fact that some of the dis¬ putants were men of practical affairs and others students of the theory of finance. ■ The marked, pronounced, and persistent disagreement between those whose learning and those whose practical knowledge of trade and manufac¬ tures gives and should give them especial influence in directing public opinion in this issue has stamped the tariff question as peculiar, and has undoubtedly led some per¬ sons, consciously or unconsciously, to conclude that it is insoluble, and others to assume that “free trade is correct in theory but in practice does not work” — the illogical position to which Sumner objected so justly and emphatically.1

The tariff has appeared a number of times in American history as a political issue of importance. In general, most men have followed the position of the party to which they were attached. Among those who felt free to vote on the question there have been many who at one time have voted one way, at another time another, won now by the logic or seeming logic of some free trade arguments, now by the belief that protection produces prosperity. Indeed the average man in this country must experience something like bewilderment as the old con¬ troversy reappears every few years; for the debates on the subject in the past, though sometimes clever, have seldom been illuminating, often petty in character, and

far from intelligent; both sides, especially the protection¬ ists, using easily refutable arguments.] Moreover, the dispute has suffered from the bitterness always engendered by /political campaigns. Some measure of this bitterness is how passing: not many now believe, as a great number at one time did believe, that protectionism is advocated only by those who are the beneficiaries of its schedules and their dupes;1 on the contrary, many must to-day recognize that the historic conflict which has been waged between the forces of protection and of free trade for the last two hundred years and more, continues unabated at the present time, and, so far as one can foresee, may be unsettled many years hence, is more than a vulgar combat among politicians, economists, and those inter¬ ested in protected industries. It is a cause celebre, whose advocates on one side can count among their num¬ bers some of the ablest minds in the fields of political science and economics, and among whose advocates on the other side may be found many of the keenest intel¬ lects in political life and industry. The extraordinary divergence of opinion noted above lends, perhaps, an especial interest to this much-mooted question; but entirely apart from that, the study of the tariff, particularly in some of its phases, is well worth while, for it is an issue intimately connected with the profound economic and political changes of the last two or three centuries. There is no subject more fertile than this in suggestions for a study of the action and reaction of ideas upon historical events and of historical events upon ideas. It is still an unsettled problem; its reappearance in England as a political question of major importance proves that even in the home of classical political economy it is still an unde-

INTRODUCTION cided issue. In truth, to many it must seem a riddle the solution of which will never be found.

Now that the bitterness formerly associated with this dispute has somewhat abated, now that we have, as the result of years of research, valuable contributions to economic history, and a broader understanding of eco¬ nomic theory, now that we have reached the one hundred and fiftieth anniversary of the publication of the “Wealth of Nations,” and may view in retrospect the whole con¬ troversy of the past, the workings of free trade in England and the workings of high protection in America and Germany during the last sixty or seventy years, is it not a good time to review without heat or rancor the whole question? Is it not possible to examine critically and fairly the chief arguments on both sides? Can it be that there are possible aspects of the problem, so far little considered, that may in some degree clarify the issue? If honest and intelligent people have differed and still differ decidedly in regard to this question, must not the suspicion arise that there may be some things that have generally escaped their observation?

In the following pages an attempt will be made to examine the pleas put forth by the advocates of both free trade and protection, and to find the proper historical and philosophical setting of the whole problem. Some new views are propounded, which it is hoped may shed additional light on this old controversy.

Chapter I “the Wealth Of Nations”

In 1776 Adam Smith, a Scotchman, published a book generally known as “The Wealth of Nations.” 1 It is a coincidence — perhaps more than a coincidence — that this work first appeared in the same year in which the Declara¬ tion of Independence was signed, for it is interesting and significant that they are both parts of the same philosophy of freedom. This philosophy of freedom or natural liberty was then, as a result of the writings of Locke,2 Hobbes, Rousseau, and others, spreading itself over the civilized world, and was an important cause of both the American and the French Revolutions. One of its first effects in France was seen in the rise of the physiocratic doctrines with which the names of Quesnay, Turgot, and Gournay are connected. Adam Smith in a tour of the Continent as tutor of the young Duke of Buccleuch met Turgot, Quesnay, and others interested in these new ideas, and was undoubtedly influenced by them, for it is evident that he adopted some of their views.3 Moreover he and

1 “An Inquiry into the Nature and Causes of the Wealth of Nations” is the full title.

2 Despite the fact that he was one of those who did most to spread the philosophy of natural liberty, Locke was “a mercantilist to the backbone.” See William Cunningham, “Growth of English Industry and Commerce,” Cambridge, 1892, Vol. II, p. 424.

3 It is now thought that the physiocratic influence on Adam Smith was rather less than had formerly been supposed. See Edwin Cannan, “The Lectures of Adam Smith,” Oxford, 1896, introduction, pp. xxii-xxiii. Adam Smith obtained some of his ideas from David Hume, who was the first to demolish the balance of trade fallacy.

“THE WEALTH OF NATIONS”

they were alike under the sway of the revolt against the restraints of the time on industry and trade. This system of restraint on commerce and industry known as mer¬ cantilism was the first organized system of economic beliefs of modern times.1

The mercantilists did not believe, as is sometimes care¬ lessly and erroneously stated, that money (or the precious metals) was the only form of wealth, though many of their writings might seem to give ground for such a state¬ ment. They, or at least most of them, did believe, how¬ ever, that it was the most desirable form of wealth, and that where the precious metals were found in abundance there also would be found opulence and prosperity. Therefore as nations that were without mines could not obtain the precious metals except by foreign trade, and even then only when this trade was so conducted as to cause a so-called favorable balance, which it was hoped and believed would be settled by a payment in money or precious metals, imports were to be discouraged and exports encouraged.

As a result of this belief, restraints on trade, always numerous and heavy, were increased in severity, and it was natural that there should be a reaction against this policy. It began in England with Hobbes, North, Petty, and others; but it was in France, where the restraints were of a peculiarly arbitrary nature, that the revolt took definite form in the doctrines of the physiocratic school. The basic principle of this school was natural liberty. Laissez fake, laissez passer was its motto. According to one of its tenets most insisted on, manufactures and

1 Scholasticism, as it is a complete system of philosophy, may be said to have been the first in Christian times. The writings of Plato, Aris¬ totle, and other ancient philosophers contain discussions concerning eco¬ nomic problems.

commerce were sterile; agricultural and extractive indus¬ tries, those activities which produced raw materials, were the only truly productive ones; they alone yielded a produit net, a real excess over the cost of producing. The physiocrats were effective chiefly in a destructive manner. A large part of their efforts were employed in criticising the legislative restrictions on manufacturing and trade. As opposed to governmental guidance and restriction, they offered individualism and natural free¬ dom. Adam Smith followed and agreed with the physiocrats in advocating this freedom in industry and commerce, but he opposed their proposition that agricul¬ ture and the extractive industries alone were productive, though he thought that they were more productive than commerce or industry.

One of the best-known passages in the “Wealth of Nations” is that in which Smith points out the advantages of the division of labor. Mankind, according to him, has learned that it can increase its productive powers by the division of labor because some men are especially adapted for doing certain work. He used pin-making as an illustration, and showed that even in his day by dividing the work among a number of artisans, each skilled in some particular operation, every man could make, or assist in making, at least 240 times as many as if he worked alone. As individuals should specialize, so nations should specialize in those branches of agriculture or industry to which they are best adapted, and thus increase the total production of the world.1 He then pointed out that division of labor is limited by the extent of the market, and believed that the market might best be extended by the greatest possible freedom of ex-

1 Adam Smith, “Wealth of Nations,” Book I, Chapter i.

“THE WEALTH OF NATIONS”

change.1 He believed that a nation prospers by each individual’s pursuing his own advantage.

The “Wealth of Nations,” therefore, was an attack on mercantilism and a plea for free trade. Its author believed that unrestrained and undirected individualism was beneficent in effect, and that most governmental guidance should be done away with. He says, “By pur¬ suing his own interest he [any individual] frequently promotes that of the society more effectually than when he really intends to promote it,” 2 3 and again, that he is “led by an invisible hand to promote an end which was no part of his intention.” 2 These and many other pas¬ sages prove that Adam Smith was a pronounced optimist in regard to the harmony of human interests, as well as a free trader and an advocate of individualism. It is true, however, that Smith, unlike some of his followers, applied his own maxims with reason and caution, and granted that there were exceptional cases. For instance, even though they ran counter to his ideas of freedom of trade and governmental non-interference, he believed in the navigation laws, because they were for the defence of the nation, and, as he said, “Defence ... is of much more importance than opulence.” 4

That the “Wealth of Nations” has been one of the most influential of books there can be no question.5 “The political economy of Adam Smith has had a tremendous practical effect. The ‘Wealth of Nations’ has been trans¬ lated into the languages of all civilized peoples. It has

1 Ibid., Book I, Chapter iii.

2 Ibid., Book IV, Chapter ii.

3 Ibid., a few lines above reference 2.

4 Ibid., Book IV, Chapter ii.

B It has the distinction of being the first book to be honored by a centennial commemoration.

IO almost everywhere directly or indirectly influenced legis¬ lation in a marked manner.” 1 “The rapid spread of his ideas throughout Europe and their incontestable suprem¬ acy remains one of the most curious phenomena in the history of ideas.” 2 The younger Pitt was one of his followers and admirers. In 1786 Pitt concluded a treaty with France abolishing many of the protective duties between the two countries, thus giving practical proof of his belief in greater freedom of commerce.

But with this exception Adam Smith did not live to see his teachings embodied in legislation; the practical effects of his ideas were to come later. “Smith persuaded his own generation and governed the next.” 3 Apparently he did not expect that his ideas would ever be adopted, and despite all that has been said of how decidedly the “Wealth of Nations” influenced the thought of the times, it is extremely doubtful whether it could have achieved the practical success it did achieve had not events so shaped themselves as to strengthen the position of those who adopted the views of the author.

The industrial revolution was the most important of these events. By the inventions and enterprise of Watt, Arkwright, Hargreaves, Crompton, and others, England was in his time becoming the greatest of manufacturing nations. The “industrial revolution” was a revolution in the sense of the completeness of the changes that took place in industry. In another sense usually connoted by the word, namely suddenness, it was

1 L. H. Haney, “History of Economic Thought,” New York, The Macmillan Co., 1922, p. 220.

2 Reprinted from C. Gide and C. Rist, “History of Economic Doctrines,” translation by R. Richards, p. 103, by special permission of D. C. Heath and Company, New York. All rights reserved.

3 Gide and Rist, op. tit., D. C. Heath and Company, p. 103.

“THE WEALTH OF NATIONS”

ii not. Here, as perhaps in other cases, we must not allow the use of the word “revolution,” perhaps first used in this connection by Blanqui in 1837, and objected to by some 1 because it gives and probably was meant by Blanqui and others to give the idea of suddenness, to preclude the idea of evolution. The so-called industrial revolution began about 1720, possibly earlier, and has probably not yet run its course. It is true that with some justification it may be contended that even in the sense of time it is a revolution, for two hundred years is a rather short period in the history of industry: more profound, more startling, and more revolutionary changes have occurred in the last two hundred years than in the three thousand years that preceded this remarkable era of discovery, invention, and change of methods of production. In this sense it is a revolution; but in the sense intended by many writers it is not. It did not begin in 1770 and end in 1790; it began long before 1770 and still pursues its course.2

During the Napoleonic wars these inventions and new processes reached a point where they were already affect¬ ing England’s industries. As a result, in part, of the genius 3 of a long series of inventors, business adventurers, and organizers, cotton cloth could be made for a fraction of what it had formerly cost. The methods, processes, and inventions which proved so successful in the cotton industry were adopted in other industries, and it soon became evident that machinery, operated by power obtained from the steam engine, could be used in nearly all productive processes. And just at this auspicious

1 A. P. Usher, “The Industrial History of England,” Boston, 1920, p. 249.

8 See discussion in Chapter IX as to what were the causes of the industrial revolution.

moment, England, as a result of her maritime supremacy and the disturbed state of Continental Europe, controlled, or almost controlled, the commerce of the world. As a consequence of these extraordinary conditions, England’s industries made immense strides. Following on these events there came in England a rapid growth in numbers, in wealth, and in importance, of a class receptive to the ideas of free trade and capable of furthering them. Population and enterprise were shifting to the north mid¬ lands, and large manufacturing towns — Manchester, Birmingham, Leeds, Sheffield, and others — were growing in much the same way as the manufacturing towns of the Middle West in this country have been growing in the last few decades. The manufacturers of these towns were establishing and extending plants with a rapidity which threatened to cause production to outrun consump¬ tion, and were eagerly searching for markets to absorb their growing output. It was beginning to be realized that England’s tariff policy hampered exports as well as imports, and that there was little hope of securing freer access abroad for the products of English industry as long as England refused to make concessions in the importa¬ tion of foreign goods.

Under these circumstances the ideas of Adam Smith were sure to make progress. In 1820 a petition for free trade, written by Thomas Tooke, author of the “History of Prices,” and subscribed to by many of the most prom¬ inent merchants of London, was presented by Alexander Baring to the House of Commons.1 In 1823 Huskisson 2

1 Cambridge Modern History, New York, 1907, Vol. X, pp. 771-773. See also G. Armitage-Smith, “Free Trade Movement and its Results,” London, 1903, p. 46.

a Dictionary of Political Economy, 1st edition, London, 1900, Vol. II, p. 148.

“THE WEALTH OF NATIONS”

put through his reciprocity of duties bill modifying the navigation acts. In 1824-25 he was able to pass measures repealing the prohibition of importations of foreign manufactured silks, and bounties on exportation of silk manufactured goods. He also succeeded in having the import duties on wool reduced.1 But as yet there was no possibility of actual free trade; there was, indeed, consid¬ erable bitterness over what had already been done. The woolen manufacturers, though they wanted free wool, refused to agree to free export of English wool. Nothing further could be effected at this time.3

England, though now the greatest of industrial nations, was still backward in some kinds of manufactures. She was inferior to France in all the finer textile arts, and Germany surpassed her in scientific methods of metal¬ lurgy.3 In cheap textiles, however, especially in cotton goods, in the manufacture of which the new machinery was first used, England was supreme; but the manufac¬ turers felt that they might export more if wages were lower, and they argued that wages would be lower if food were cheaper; hence they found themselves opposed to the landed interests in their desire for a repeal of the so-called corn laws, acts imposing a duty on wheat and other grains when imported. Also they believed that agricultural countries like Hungary and Poland would buy more manufactures of England if they could pay for them with exports of foodstuffs. The fact is that England was no longer able to feed herself. Thus began the agitation for the repeal of these laws, and by some for free trade in general.

1 Stephen Dowell, “History of Taxation and Taxe9 in England,” Lon¬ don, 1884, Vol. II, p. 264.

2 J. F. Bright, “History of England,” New York, Vol. Ill, p. 1379.

3 Cambridge Modern History, Vol. X, p. 755.

The battle for free trade was thus to a great extent a contest between landowners and manufacturers. The opposing factions were joined not only upon this issue, but, simultaneously, upon the question of factory legisla¬ tion. “The Free Traders taunted the land-owners with the miserable wages paid to agricultural labourers, and with the fact that their rents were swollen by the excessive prices taken from the very poorest of the population for the necessities of life. The land-owners could make no effective direct reply, so they in turn reproached the manu¬ facturers for drawing their profits out of the toil of miserable children beaten in order to make them keep pace with the machines. When Parliament had intervened to protect the operative, the argument became more one¬ sided. It was still more one-sided because the manufac¬ turers after 1842 could urge that they had been deprived of the protection which the fiscal system had previously given them, and that they had accepted the alteration willingly.” 1 * Later the country gentlemen voted gladly for further factory legislation, not so much because they sympathized with the mill hands, as “because it seemed a method by which they could get even with the repre¬ sentatives of the manufacturing towns for the repeal of the corn-laws.” 3 *

In 1838 the Anti-Corn Law League was founded.8 By its paper, called “The League,” and by an active canvass and an unusually violent agitation, it succeeded in convert-

1 Gilbert Slater, “The Making of Modern England,” Boston, Houghton Mifflin Co., 1913, p. 142.

a A. G. Warner, “American Charities,” New York, Thomas Y. Crowell Company, 1919, p. 16.

3 Richard Cobden was the leader in this movement. Other important

“repealers,” as they have been called, were Bright, Villiers, and Prentice.

“THE WEALTH OF NATIONS”

ing the opinion of the country to its views.1 2 3 The cotton manufacturers were the most influential element in the Anti-Corn Law League. Besides desiring the repeal of the corn laws because they thought it would help the exportation of cotton goods and lower the price of bread, they believed that the doctrine of free trade and its general adoption would be furthered if Great Britain, the home of Adam Smith, led the way; and with freer trade they hoped to increase their exportation of manufactured goods. Finally, they felt that a lower price for food meant better nourished and more efficient operatives.* To these practical considerations was added the belief that the triumph of their ideas was for the general welfare of the country.

In 1841 Sir Robert Peel became Prime Minister. “Told in the briefest form, the story is that Peel came into office in 1841 to maintain the Corn-laws, and that in 1846 he repealed them.” 8 In 1840 a committee appointed to consider import duties had recommended that taxes on many articles should be abolished. In 1842 Peel succeeded in abolishing, in conformity with the report, many duties, and in lowering others. “The gen¬ eral principle was that all raw materials and all semi¬ manufactured articles should be imported under nominal duties only, and that the duties on manufactured articles should not be prohibitive.” 4 * Owing to good harvests, the free traders seemed to gain little between 1842 and

1 John Morley, “Life of Cobden,” Boston, 1881, p. 97. See also Armitage-Smith, of. cit., pp. 63-64.

3 Justin McCarthy, “History of Our Times,” New York, Harper and

Brothers, Vol. I, p. 216.

* Slater, op. cit., Boston, Houghton Mifflin Co., 1913, p. 141.

i6

1845.1 In that year, however, the harvests were very poor, and in Ireland there was a complete failure of the potato crop. Peel proposed a repeal of the corn laws, but, finding his colleagues dissented from him, resigned. Lord John Russell attempted to form a cabinet, but failed, and Peel again resumed office, with Gladstone as Chan¬ cellor of the Exchequer in Lord Stanley’s place. In 1846 Peel proposed the gradual repeal of the corn laws. The duty was to be much lower for three years, after which time, February 1, 1849, all grain was to be admitted at one shilling duty. The bill was finally passed by both houses of Parliament.2 3 Peel generously gave to Cobden 8 the credit for the success of the repeal movement, but had it not been that England had at that time a man who was not afraid to change his former opinions, and who had little regard for his future political career, it is pos¬ sible that the corn laws would not have been repealed in 1846. As it was, Peel was unable to continue in office, and was succeeded by Lord John Russell.4 Its work having been accomplished, the Anti-Corn Law League was dissolved on the second of July, 1846. It had been ably directed and its object vigorously pursued.

In advocating the repeal of the corn laws, Cobden, Bright, Villiers, and others had used general free trade arguments, and hence it is not surprising, so well and effectively had they agitated, that all, or nearly all, restric¬ tions on commerce and industry soon disappeared in England. In 1849 the navigation laws, or what remained of them, were repealed by Gladstone. In 1853 he repealed the duties on 123 articles, and lowered the

2 Slater, op. cit., p. 143.

3 Morley, op. cit., p. 261.

4 McCarthy, op cit., Vol. I, pp. 274-275.

“THE WEALTH OF NATIONS”

duties on 133 others.1 In i860, after great diffi¬ culties had been overcome by Cobden, who in an unoffi¬ cial way had represented the English government in Paris, a treaty was concluded by which Great Britain agreed to lower the duties on brandy and wines, and abolish the remaining duties on manufactures, and agreed not to impose again an export duty on coal to France. France in turn agreed to abolish prohibitions on British goods, and to lower duties on British textiles, manufac¬ tured iron, machinery, tools, glass, leather, and some other commodities to less than 30 per cent ad valorem .2 The negotiation of this treaty, which lasted until 1882, was made possible by the attitude of the Emperor Napoleon III, who possibly was influenced quite as much by political as by economic motives. The French economist Chevalier contributed materially to the success of Cobden’s mission. In accordance with the engagements entered into in this treaty, Gladstone, as Chancellor of the Exchequer, reduced the number of taxed imports to forty-eight, and removed the last duties on manufactures.3 By this tariff act Great Britain became a free trade coun¬ try, for with the exception of the timber duty abolished in 1866, and the duty on sugar repealed in 1875, there were na protective duties levied after i860.