Industrial America; Berlin lectures of 1906

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Preface

In connection with the interchange of professors between Germany and America, in which the German Emperor has taken an interest, the author was invited by Director Althoff, of the Cultus-Ministerium, to deliver a course of lectures in the spring of 1906 before the Vereinigung jur Staatswissenschajtliche Foribildung, in Berlin. Lectures from this course were also given in the Gilrzenich in Cologne and before the students of the University of Berlin. To German audiences the German language was used. It was suggested that these lectures should deal with the industrial problems which are at present occupying public attention in the United States. Although time and space create obvious limitations to any detailed exposition of each subject, an honest attempt has been made to present to non-specialist hearers such an impartial account

vii

PREFACE

of the situation as an inquiring foreigner might find instructive and important.

While these studies were prepared directly for a German audience, it is thought that possibly they may be useful to readers in this country, who may wish to inform themselves upon the pivotal issues of the day, and yet who may have no time to give to an exhaustive course of reading.

Acknowledgments are due to Messrs. D. Appleton and Company, and to Professor Johnson for the use of several maps showing the grouping of railways in the United States, taken from " Railroad Transportation."

J. Laurence Laughlin.

University of Chicago, 1906.

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Contents

CHAPTER PAGE

I. American Competition with Europe . . i

II. Protectionism and Reciprocity . ... 33

II Protectionism And Reciprocity In The United States

IN the Rocky Mountains a wild-cat is said to have leaped from a tree upon a hunter, who happened to catch the animal so that it could not bite, but also so that he did not dare to loose his hold. Thus the beast was carried for miles until, with assistance, it was finally killed. In much the same way the United States finds itself in the clutches of protectionism ; it cannot easily rid itself of the system, it is a heavy obstacle to foreign trade, and it needs outside help to destroy the incubus. Our resources and our strength are sufficient to bear the burden of this system for the time, but it is openly admitted that it is now holding us back from actively expanding our trade with foreign countries. Possibly we may hope to find some neighbors who, in friendly reciprocity, may help us to lighten the burden we are carrying.

It will be remembered that this burden has not 33 always been so heavy. After the panic of 1837-39, a regime of very low duties, under the acts of 1846 and 1857, was accompanied by very great prosperity in the fifteen years before the Civil War. Political considerations enabled the small protectionist party, before Lincoln's election, to pass the Morrill act of 186 1, by which increased duties were placed on iron and wool, specific substituted for ad valorem duties, and rates in general fixed somewhat above those of 1846. This measure was a bid for the Republican vote of Pennsylvania and of some western wool-growing States; but, as yet, manufacturers in general were not seeking protection. The system had not yet taken the country in its grasp.

As the war progressed, an unintelligent fiscal policy — due to inexperience with affairs of such magnitude — led to great confusion and a "veritable furor" of taxation. Out of this situation came the war- tariff of 1864, which remains practically the backbone of the system as it exists to-day. This act of June 30, 1864, enormously extended the internal revenue taxes, 1 on the principle of the Irishman at Donnybrook Fair:

1 See Taussig, " The Tariff History of the United States." For this quotation from David A. Wells, see p. 164 of Taussig.

" Whenever you see a head, hit it; whenever you see a commodity, tax it." There was no real study of the incidence of taxes. Everything, including incomes, was heavily taxed. And let me remark here that internal revenue duties have ever since this time borne an important relation to the protectionist policy. At this time they were assigned as the justification for a prodigious increase in import duties, in order to give domestic producers a protection equal to the rise in internal taxes. The act did more than this. Under cover of the needs of war revenue for the State, selfish private interests introduced schemes for special favors — in fact, they sprang upon the country, in its weakened condition, and have never since relaxed their grasp. The best historian 1 of the period describes how this policy "resulted in a most unexpected and extravagant application of protection, and, moreover, made possible a subservience of the public needs to the private gains of individuals such as unfortunately made its appearance in many other branches of the war administration. Every domestic producer who came before Congress got what he wanted in the way of duties. Protection ran riot; and this, moreover, not merely for the time being. 1 Taussig, ibid., pp. 166-67.

The whole tone of the public mind toward the question of import duties became distorted. Not only during the war, but for several years after it, all feeling of opposition to high import duties almost entirely disappeared. The habit of putting on as high rates as any one asked had become so strong that it could hardly be shaken off; and even after the war, almost any increase of duties demanded by domestic producers was readily made. The war had in many ways a bracing and ennobling influence on our national life; but its immediate effect on business affairs, and on all legislation affecting moneyed interests, was demoralizing. The line between public duty and private interests was often lost sight of by legislators. Great fortunes were made by changes in legislation, urged and brought about by those who were benefited by them; and the country has seen with sorrow that the honor and honesty of public men did not remain undefiled. The tariff, like other legislation on matters of finance, was affected by these causes. Schemes for money-making were incorporated in it, and were hardly questioned by Congress. When more enlightened and unselfish views began to make their way, and protests were made against the abuses and excessive duties of the war period, these had obtained, as we shall see, too strong a hold to be easily shaken off."

This high level of duties (averaging 47.06 per cent), crude and full of abuses, remained in force without reduction for twenty years. After the close of the war, when relief from oppressive taxes became imperative, successive acts for reducing and removing the internal taxes were passed. By 1872 all those which had been the reason for the high compensating import duties had disappeared. Then was disclosed the strategy of the protectionists, which has been resorted to in similar ways from that day to this. With the removal of internal taxes, there should have gone a reduction of such import duties as had been raised to offset the internal taxes. This, however, was not done; and, generally speaking, it has never been done. A system introduced under cover of a national war emergency has been made permanent by a process of passive resistance to change. In short, the adoption and continuance of high protection was never reached after open discussion and a campaign of education among the voters. To avoid discussion of its purposes has been, and is now, a consistent policy. In the main, the advocates of protection try to continue all rates once established.

The result of such a tendency, of course, has been the creation of a rigid and inflexible range of duties quite disassociated from the inevitable changes due to the progress of industry.

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After the Civil War, the experience with heavy duties led to a reaction in favor of tariff revision. But under skilful guidance, the protected interests wisely bowed before the storm, and in 1870 consented to a reduction of import duties — but only on purely revenue articles such as tea, coffee, wines, sugar, molasses, and spices. Yet, under cover of this reduction, the protective duties on steel rails and some other goods were very cleverly raised. Again, in 1872, a strong wave of tariff reform was met by a horizontal reduction of ten per cent. While adroitly granting this concession, the protectionists succeeded in abolishing entirely the revenue duties on tea and coffee, and in reducing the internal taxes on tobacco and whiskey. The principle has been to abolish all non-protective duties — such as those on cocoa, pepper, cinnamon, cloves, and olives — in order that protective duties should be retained. The protectionists were justly proud of this revision of the tariff "by its friends,"

under which fifty-three millions of dollars in duties were removed, and yet the protected industries were left practically untouched.

After the panic of 1873 had reduced our imports and our revenue, and when the efforts of tariff reformers had been much forgotten, the act of 1875 quietly repealed the ten per cent reduction of 1872. Thus is explained the wisdom of the temporary concession in 1872: a general reduction or advance, which did not touch specific industries, did not attract much public attention. Thereby a tactical advantage has been gained. For, since then, bills proposing to lower duties have had little chance of success. Consequently, exorbitantly high war duties have been long maintained in times of peace, and expenditures have been easily stimulated to use up the income. The needs of the fiscal system, under proper revenue duties, have had no more consideration than the colors of the sunset.

" The connection between tariff legislation and the state of the revenue has indeed been curiously constant in our history. . . . In 1861 the Morrill tariff was passed, partly in order to make good a deficit. During the war the need of money alone made possible the act of 1864. The ten per cent reduction of 1872 was called out largely by the redundant revenue; its abolition in 1875 was excused by the falling off in the Government income. " 1 After 1880 the surplus ran about a hundred millions a year, and led to a demand for a reduction of the tariff. In 1882 a tariff commission was appointed, filled by protectionists, which reported in favor of a reduction of duties by twenty or twenty-five per cent. When the subsequent act of 1883 was passed, it was found that, instead of a reduction, duties were raised on woollen dress-goods, woollen cloths and cassimeres, cotton hosiery, embroideries, trimmings, laces, insertings, etc.; iron ore, steel ingots, piston-rods, etc.; files, quicksilver, and many kinds of tools and machinery. Reductions, pro forma, were made on wool, some woollen goods, cheap cotton goods, pig-iron, steel rails, copper, and marble; but in no case was full protection removed, so that these changes brought no gain to the consumers in lowered prices. That is, after twenty years the high level of the war duties was practically reenacted. Every demand of this country for relief had been denied.

The defeat of President Cleveland in 1887 was interpreted as a verdict against tariff reform and in favor of the Republican form of reciprocity.

1 F. W. Taussig, ante cit., pp. 230-31. 40

Consequently the McKinley act of 1890 was passed, imposing still higher protective duties and taxing articles hitherto untaxed. This same act introduced the question of reciprocity by putting certain articles — chiefly sugar, coffee, tea, and hides — on the free list, with a notice that if other countries would not admit some of our goods at privileged rates, these articles would be removed from the free list for those countries that refused. The essential idea of reciprocity, as viewed by the protectionists, is the admission free of only those articles which are not produced in the United States. On this ground reciprocity could be urged as not in conflict with protective principles. Obviously, the offer of only non-competitive products is too limited to be anything more than a pretence. In the main it has been possible to admit only "tropical products," and to exclude manufactures and the main articles of European imports. In actual operation, reciprocity has hinged on the admission of sugar free. Under the act of 1890, treaties were negotiated with Germany and Austria-Hungary. Germany granted us lower duties on wheat, corn, meat products (except pork and bacon), cheese, oleomargarine, flour, and certain live animals, and placed on the free list some agricultural products, hides, tan-bark, and wool. The provisions favored our agricultural interests. The great reason for this action of Germany, of course, lay in the desire to get her sugar into the United States free. The same was true of Austria-Hungary, which favored our manufactures in return for free sugar.

The results of the reciprocity treaty with Germany were not important. Our exports to Germany for the year to June 30, 1891, before the treaty went into effect (February 1, 1892), were $92,795,456; in 1892 (including only five months under reciprocity), $105,521,558; in 1893, $83,578,- 988; in 1894, $92,357,163. Thus no gain can be attributed to the treaty. On the other hand, our imports from Germany, before reciprocity, were $98,837,683; but in 1892, only $82,907,553. In 1893 they rose, then fell off heavily in 1894. No increase in our imports, then, can be ascribed to the treaty. Undoubtedly, other conditions had more influence than it.

In 1892 came a tremendous reaction against high protection — the causes of which will be explained later — which reelected Mr. Cleveland president, and gave the Democrats control of both houses of Congress. The tariff-reform policy of the Democratic administration led to the passage of the Wilson act, August 24, 1894, based upon free raw materials, and a reduction of duties on articles of common use. The original Wilson bill proposed to put on the free list raw sugar, hides, tea, and coffee ; but the protectionist Senate (including some Democratic protectionists) — under the influence of the sugar trust, as every one believes — added a schedule of duties on both raw and refined sugar. If we keep in mind that it was sugar which served as the basis for the only reciprocity of importance under the McKinley act, it will be seen that the taxing of sugar by the Senate was the true cause of the destruction of that reciprocity. To be sure, the administration opposed the reciprocity of the McKinley act as being a retaliatory measure, and as really acting to increase the cost of goods to American consumers; but the Wilson bill specifically provided for the retention of the reciprocity treaties then existing, and they would have been continued but for the tax on sugar.

The outcome of this legislation is curious. The sugar duty raised a storm of protest in Germany, and retaliation by them could reach, of course, only those agricultural products other than sugar which entered most largely into our exports to Germany. Therefore, the favors given the sugar trust by the United States were paid for by our farmers. And to the same source must be attributed the difficulties encountered at that time in Germany by our life-insurance companies. Throughout the whole experience with reciprocity, our manufacturers have never been willing, under any circumstances, to yield one jot to encourage reciprocity. Constantly higher duties have been obtained under every possible pretence, until foreign goods have in many cases been practically excluded from our markets. Obviously, when other countries lose their patience, and treat us as we treat them, by raising a barrier against our goods, this action falls grievously not on the offending manufacturers, but on the classes producing chiefly bread-stuffs or makers of agricultural implements, which form the largest part of our exports to other countries. The problem of reciprocity, therefore, in the United States is simply a contest of selfishness on one side against the selfishness on the other side of a desire for markets in which to sell our surplus goods. In all cases, reciprocity — in any real sense — is a choice as to those to be sacrificed. There is, therefore, little to be hoped from it. So far, reciprocity has been put forward by the protectionists as a device to occupy the attention of the public, and to side-track direct attempts for the revision of the tariff. By snapping the fingers of his left hand, the conjurer can draw away the attention of his audience from the tricks done by his right hand. If, as repeatedly asserted by party managers, reciprocity is intended to apply only to non-competitive goods, it can never be anything more than a farce.

The nomination of Mr. Bryan on a free-silver platform in 1896 led to the election of Mr. McKinley. Although winning on the money issue, the Republicans immediately made an excuse of the need of more revenue, and in the Dingley act, July 24, 1897, wiped out the provisions of the Wilson act, and raised import duties to the highest point ever known. This new legislation, which is now in force, taxed both hides and sugar; and a very saturnalia of protection ensued. A request for duties from any industry was practically sure of acceptance. As regards reciprocity, the provisions of the existing Dingley act now admit of three kinds of treaties :

1. The old "tropical" reciprocity of theMcKinley act was allowed, but instead of free sugar and hides, tonka beans were substituted.

2. With European countries, lower rates were to be offered on wines, works of art, etc.

3. A reduction of twenty per cent from the Dingley rates for a period of not more than five years was granted on any goods agreed upon.

There was more promise than observance in these sections. The substitution of tonka beans for sugar and hides added to the gayety of nations, but not to their trade. The first two kinds of reciprocity could be negotiated and proclaimed by the President, because there was nothing of importance in them. But all treaties of the third kind entered into by the President must be ratified by the Senate. In other words, general reciprocity was offered, supposedly in good faith, but in reality, whenever grasped at, the package of favors was deftly pulled away by a string. That is, none of the reciprocity treaties — of which the French Treaty, studied with great care, is a good example — were allowed to pass the protectionist Senate. These are the well-known "Kasson Treaties," and they have furnished a complete test of the extreme protectionist sentiment in the Congress of the United States, which, even under the urging of President McKinley, was unwilling to abate in any way the excesses of a very high range of duties long since shown to be out of joint with the progress of the age. No industry has yet been found willing to admit foreign competition for the sake of gaining a market abroad for the products of other industries. Hence reciprocity, in practice, stands convicted as an absurdity.

It is this situation, created by the increased rates of the Dingley act, which has excited against us the antagonism of Europe. Under the German "December Treaties " the United States will be shut out from the status of a favored nation, unless it grants some reduction in return for the lower range of duties into Germany. The United States wishes Europe to admit its agricultural commodities at a low duty; while Europe wishes the United States to admit its manufactured goods on a like basis. This is the form of the present deadlock.

In fact, the time is ripe for a campaign against the excesses and abuses of protectionism, if any party has the wisdom to see that courage is a source of success in American politics. The conflict has been waged about wool, woollens, and iron and steel. Woollen goods have received very heavy protection; but they do not show any marked influences derived from the duties. The cotton, silk, and iron industries have all grown more rapidly than the woollen; which shows unmistakably how distinctly other causes than the tariff must be considered in studying the growth of an industry. For reasons quite independent of the tariff, the iron and steel industry has developed greatly; and now that we have become exporters of steel, steel no longer needs protection. The upbuilding of the silk and steel industries has been due to the introduction of new methods and new machinery. On the other hand, the heavily protected woollen industry is not in advance of the industry abroad, and it has no machinery superior to that used in foreign countries.

The woollen manufacturers have been handicapped by the duty on raw wool. They accept this solely on the ground that the larger the number of interests dependent on the tariff, the stronger the body of defenders when any part of the system is attacked. If there were free wool, the woollen manufacturers would gain in many ways, especially in experience with a variety of materials as yet untried. The duty on raw wool, moreover, has not succeeded in increasing the flocks of sheep in the United States, nor has the high rate of the Dingley act kept up the price of wool. In 1905 the number of sheep has decreased one-fourth since 1884, and although the ad valorem duty is the highest ever known, the imports of raw wool are greater than ever before. After eight years of the Dingley act, there are fewer sheep in the New England, Middle Atlantic, Northern Central, and Southern States than at any previous time, even when wool was admitted free. The reason is obvious; by division of labor, it is found that good farming land is more profitably used in raising crops than in pasturing sheep. Consequently, successful sheepraising is practically driven westward, as fast as the land is taken up by farmers, until it has found a permanent home in the mountain regions of Montana, Wyoming, Colorado, Nevada, Arizona, and New Mexico. There is no need of a protection for sheep in this region adapted to no other industry. In these places only have sheep increased in number; but the growth will cease when the capacity of this range has been reached. In the East, sheep are kept only for mutton. 1

Moreover, the consumption of wool has decreased because of the increased use of shoddy and cotton in cloth formerly made of wool. In hosiery and knit goods, cotton has practically superseded

l Cf. C. W. Wright, "Wool-Growing and the Tariff since 1890," Quarterly Journal of Economics, August, 1905.

wool. In fact, whatever advantage there has been

in the duty on wool has accrued to the cotton

grower.

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The United States has had high protection since 1864; the United States has made marvellous progress in the development of her resources and in a varied industrial expansion during the same period. Hence, some shallow reasoners — or some interested advocates — say: "The prosperity of the United States has been due to protection." No economist is deceived by this statement of the post hoc, propter hoc fallacy. During the time when I have been standing on the corner of a street in Chicago a thousand vehicles may have passed me: shall I argue that they passed by solely because I stood on the corner of the street ? It would be the height of folly for friends of the United States in foreign lands to refer to our country as an example of the happy results of protection. There is no denying the advantages of assistance in getting industries started that have no natural reason for their being here; but for these industries — which are legion — in which we have material advantages, the causes of our success are deeper than any enactments of Congress: our phenomenally rich stores of raw

So materials — coal, iron, copper, zinc, timber, oil, cotton — taken with the skill and racial advantages of our laborers, and the boldness and ingenuity of our managers, are, without question, the most powerful factors in building up our surprising prosperity. It is, therefore, poor logic and poorer judgment to assign all the results of these great factors to anything so artificial as legislative enactments. At the best, protection could have had no more influence on our national development than a good rubbing by a trainer could have upon a man shaped by Nature as a great athlete.

IV

The origin of the protective system in greed and selfishness is plain enough. Whatever economic justification for protection there is, was brought forward only after its existence created the need of justifying its continuance. These economic propositions need not here be introduced, since the argument for and against protectionism must be familiar both to economists and to the business world in all countries. It is not my duty in this place to argue for or against the tariff system, but to report to you scientifically and impartially, if I can, the exact facts and the truth about the workings of protectionism in the United States. Obviously, this is not an easy task, since no one can wholly detach himself from the prejudices and influences of his milieu. Yet some things become so plain, that he who runs may read. And one of these things is the inevitable outcome of the forces which gave birth to the system.

Being a means of protection against foreign competitors, tariff duties are the legislative expression of an attempt by a government to direct, more or less, the private industries of a country. Such an attempt has a socialistic quality. Moreover, in the United States, at least, the continuance of this directing policy was dependent upon the success wdth which the protected interests could control the machinery of a political party, and through it secure the needed legislation. It will be recalled that, in its actual establishment in 1864, this policy was adopted in a time of great peril, under the pressure for a great revenue, and that its enactment was unaccompanied by any debate or amendment whatever. A measure which, on a great scale, brought private interests into the legislative halls; which has made a necessity of an unscrupulous lobby; which has opened the purses of millionnaire manufacturers at every campaign; which has put at stake in our elections, not merely political principles, but the continuance of important industries; which has so far vitiated our electoral contests with questions of pecuniary rewards that it is impossible to obtain a fair and full discussion and settlement of great economic questions on their merits; a step which has poisoned the stream of justice in its very source in the law-making power — this measure was decided upon without reflection, and without discussion of its effects upon the character of our public men or upon the political atmosphere of the country. To a German audience the exposition of the American situation would not be clear unless it were prefaced with a statement concerning the seat of real political power. The President and his cabinet are executives, and they have only indirect influence on legislation. The party in power is governed by a group of political managers — commonly known as the "leaders" — who direct the policy as to political issues in the elections, and who dictate the actual legislation for the party in Congress. These managers have the chief influence in drawing up the political platform to be adopted by the party convention; and thus are enabled to put behind proposed legislation the ostensible mandate of the popular vote which placed their party in office. The machinery of the Republican party is in the hands of the protectionists, and the leaders in the Senate and House have direct control over the legislative policy on protection. The President and his cabinet, not being represented on the floor of Congress, can influence legislation only through patronage, or by stirring up outside public opinion in a way to affect the votes of members of Congress.

As a lover of my country, it is a painful duty to explain the operation of some forces now at work in our political life; and only because, as a scientific student, I am expected to make a truthful report, could I be obliged to mention them here.

Never has the upper house of Congress been held so cheaply by the citizen as it is to-day. The traditional and honorable title of senator now covers the mountebank, the unscrupulous lumber or mining king, or the successful manipulator of State legislators through the use of corporation interests within the States. The demagogue who burns red lights before the masses to cheat them into the idea that he is a tribune of the people, and who is thereby voted into the Senate, is a clean person compared to the man who takes his seat in that august body knowing that he would not be there were he not willing to vote and act — not as the representative of all the people, but — as the attorney for large private interests. There are senators, it is true, of eloquence, ability, astute statesmanship, commanding learning in the law, and high personal integrity; but it is also true at this very hour that a bill touching the interests of the sugar trust, or of many another great interest protected by the tariff, could not possibly pass the Senate. This is an unmistakable consequence of embarking on a policy by which industries are directly affected in their profit and loss by legislation. The concerns of the State as a whole become thus inextricably entangled with the pecuniary gains of special interests or of private persons. This situation would be black indeed if it were supposed that all who vote in favor of special interests do so because they are personally corrupt. This is not true. Very many senators, no doubt, vote according to the declared policy of their party, whether it is right or wrong; and others may honestly believe that protectionism or favors to the "trusts" are of advantage to the country.