Free trade vs. protection ...

Preface

^T^HIS is not an attempt at a learned book on the -*• vexed subject of free trade against protection. It is an attempt to interest the average American citizen in the subject, to show him what free trade is (meaning thereby a tariff for revenue only) and its advantages; and what protection is and its disadvantages. Statistics have been avoided as much as possible, as well as any elaborate citation of authorities for statements made. Entertaining a feeling of contempt for protection, I mean to be outspoken in denunciation of its pretensions, follies, absurdities, inconsistencies, arrogance, charlatanry and humbuggery. In my opinion, it is a fertile source of fraud and corruption, and its elimination as soon as is practicable, with due regard to the interests that have been fostered under its baneful influence, has now become a moral necessity. Detrimental to the interests of the consumer, it is also injurious to the producer, by inducing him to lean upon the government for " protection," instead of relying upon his own resources and powers.

My book is controversial, aggressive, and contemptuous, for it has been my purpose to give my protectionist antagonists the same treatment they

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give free traders (meaning always by free traders those who stand for a tariff for revenue only).

If it be objected that I repeat myself over and over again, I admit it, and I reply that I have done so of set purpose, because through reiteration I hope to drive home my argument.

We Americans pride ourselves on our country, its size, its magnificent dual form of government, its wonderful natural resources in coal, iron, copper, gold, silver, forests, mountains, plains, prairies, lakes that are inland seas, the opportunities we offer to every comer, our public school system, our constructive and business ability, our great railroad systems, our inventive genius, our telegraphs and telephones, our banks, immense wealth, enormous volume of business, our cotton, wheat, corn, tobacco, etc., and, in general, our ability to take the lead and to beat the world in anything we choose to undertake. Indeed, we are credited not only with having this very high opinion of ourselves, but also with a certain measure of success that shows our claim is well founded.

Yet it is a certain source of satisfaction to foreigners when they find that, in spite of all these extravagant claims and success in establishing them, a majority of Americans admit that we cannot stand up against the inferiorities of the rest of the world unless we "protect" ourselves against them.

The remarkable part of this admission is that

Preface vii

the weaker the foreigner, the more ignorant he is, the less capacity or skill he has, the greater the necessity for protection against him. I confess I have never been able to get over the surprise with which I first learned of the absolute necessity as a sine qua non, if a country would succeed, of this kind of protection of the strong against the weak of this earth. I had always supposed that the weak needed protection from the strong, but I learned that the stronger and abler and more efficient a nation becomes, the greater is the necessity for " protecting" it against the inefficiency and incompetency of the weak. Mark Twain is the only writer who could have done justice to the logic of such a doctrine, and I will not pursue the subject further.

I maintain that the violent shock to importation by the Embargo Act and the War of 18 12-15, with the legislation following that war, gave an impetus to the textile industries of cotton and wool and to the iron and steel industries that were all the protection they needed, if they ever needed any, which I deny; that they were successfully established busi* nesses in 1846, when the Walker tariff was adopted, and long before that time, and from that day to this have never needed protection even if protection be sometimes allowable in such a case as that laid down by Mill*

* Principles of Political Economy, bk. V, Ch. 10, §1.

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I contend that the protection given by the tariff since the war has been a very saturnalia of protection, and that at this time this country is the last one in the world that needs protection or in which any good reason can be given why it should be continued.

With the expenses of the Civil War there came, necessarily, taxation to met those expenses. Everything was taxed, and, under the name of internal revenue, excise taxes were imposed. So long as the excise tax w r as equivalent to the import duty on the same article it made no difference to the country, nor to the consumer, whether the home-made article or the imported one was bought and used. The consumer paid the same price for either and the tax on either went into the treasury of the United States. But this balance was disturbed when the duty remained unchanged, and the excise tax was reduced and finally abolished. This was equivalent to increased protection, just as if the duty had been raised and the excise tax had remained as it was. Excise taxes were odious to our people and there was a clamor for their reduction and removal. Protectionists were adroit enough to see what an advantage they would gain by the course taken, and, so far as I am able to learn, no one pointed out adequately the wrong done by reducing excise duties without equivalent reduction of import duties.

Had the proper relation between the two been preserved we might have been during all these years,

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and we might be now, under free trade, by which I mean a tariff for revenue only.

This failure of free traders to insist upon maintaining an equivalence between excise dues and tariff dues is but a part of the failure on their part to maintain the lead that was theirs prior to the Civil War through the success of the system looking towards free trade (meaning a tariff for revenue only), bound to end, if maintained, in such free trade. I am unable to say why free traders lost their grip after i860. It will remain for some future historian to determine why it was that protectionists gradually took the initiative and soon became aggressive, dominant, and domineering; and such is their attitude now. It is an attitude of lordly superiority, of aggressive assertion of claims ever rising in the scale of contemptuous disregard of anything and everything militating against their theories, and this has resulted in a common belief on the part of a majority of the American people that a doubter of the virtues of protection is a man to be shunned, a man whose judgment is not to be trusted, and who, even if he has a right to doubt the merits of protection, ought to keep his views to himself. I think it is time for free traders (meaning those who want a tariff for revenue only) to quit the defensive and to take the offensive with some of the aggressiveness of protectionists. The spirit of satire and ridicule with which Bastiat and Sumner met the absurd claims, x Preface

sophistical reasoning, and charlatanry of protectionism should be encouraged and freely used by free traders. The fact that all through my book I am obliged to define what I mean by u free trade" when I use the term, shows how protectionists have succeeded in obscuring its true meaning, as well as the meekness and want of self-assertion with which free traders have calmly submitted to this obscuration.

I think, further, the time has come when free traders should dwell more not only upon the inherent immorality of protection, but also upon what I consider to be established fact — the fraud and corruption that protection breeds. No one can deliberately and judicially study the history of the successive tariff revisions of the past fifty years without coming to the conclusion that each one is attended by more and more misrepresentation, lobbying in its worst forms, and greediness in securing more special favor by each particular interest, combined with " log-rolling" or pooling of interests to secure benefits for all in the pool. So far has this been carried that it has become the controlling force in screwing up protection ever higher and higher, even when the mandate of the country has been in favor of reduction. While admitting the value of the researches of Edward Stanwood as published in his American Tariff Controversies in the Nineteenth Century, I think he is entirely in error when he says, "There has never been a time in the history of the

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country when the predominant motive to protection was found in a selfish wish of manufacturers that the government should increase their profits by laying heavy duties upon foreign goods." He admits that such a motive has been present, and that it has been aggressive and occasionally offensive. Similarly, I admit that many protectionists are perfectly honest and sincere in their advocacy of protection, but I maintain that now and for many years our overweighted system of protection has been and is maintained by the organized greed and selfishness of the great protected industries of the country, supported by the general ignorance of our people as to what free trade really is, and the aggressive, supercilious tone of protectionism, always on the alert to retain all the protection it has gained and to gain more whenever it can. Protection is the Old Man of the Sea that has got on our backs, and the question now is how we are to get rid of it.

I ask my readers to remember that by free trade I mean a tariff for revenue only. It might not be necessary to repeat this constantly, but protectionists perversely insist upon misusing the term and many persons who are not protectionists are so hazy in their understanding of what free trade is, that I am obliged to say over and over again that by free trade, I mean a tariff for revenue only. I do not mean by free trade the abolition of all custom houses, the abandonment of all duties on imports, absolute xii Preface

free trade such as exists between the states of our Union. Great Britain is a free trade country in the proper sense of the term; she has custom houses and has a tariff for revenue only, with hardly any exception. Yet in the same breath protectionists will speak of England as a free trade country — and will ask you if, being a free trader, you intend to abolish all custom houses !

For their kindness in permitting me to use extracts from the undermentioned books, my thanks are tendered to authors and publishers: Miss Ida M. Tarbell, The Tariff in Our Times, the Macmillan Co. ; Prof. F. W. Taussig, Tariff History of the United States, G. P. Putnam's Sons; Mr. Edward Stanwood, American Tariff Controversies in the Nine' teenth Century, Houghton Mifflin Co.

Contents

I Definitions . . .

II Commerce ....

III Commerce (Continued)

Chapter I Definitions Meaning Of The Word " Tariff "

npHE origin of this word shows the antiquity of -*■ protection and the hollowness and absurdity of the claim made by protectionists in the United States that it is an American system. Tarifa was a town and a castle, about twenty miles from Gibraltar, where Moorish pirates exacted tribute from passing vessels for about eight centuries during the Mohammedan sway in Spain. The same system has existed for centuries in China, under which " squeeze stations," so called, exacted and still exact tolls from every passing vessel. For ages the robber barons of European feudalism levied a similar toll on commerce. Adam Smith, in The Wealth of Nations, says, "The protection of trade in general from pirates and freebooters is said to have given occasion to the first institution of the duties of customs." When Mr. Roosevelt, in his carefully prepared address in Providence in August, 1912, spoke of "the prize money" of protection, his language was logical, though it conceded more than he meant to concede.

As now carried out in this country, protection is the levying of a toll or tax, called a duty, for the benefit of those modern pirates and freebooters, the big interests and trusts. If objection is urged to the use in this connection of such hard words, we will soften our language by calling them, more politely, 11 privateers," since they are licensed by law to levy this prize money, more of which, Mr. Roosevelt says, ought to go to the working class. But whoever gave to protection the name of "the American system" was either ignorant of history or had unlimited audacity, for the system existed for centuries before the United States were dreamed of, and long before the laws of political economy were known.

LIMITED MEANING OF " PROTECTION " IN THE UNITED STATES

The particular meaning of protection, as the word is used in this country, is the system favored by Hamilton, for which much may be said in the infancy of a country, i. e., the development of manufacturing industries by means of discriminating duties upon foreign manufactured goods. But the term has a much wider meaning, i. e., all the means by which a country may undertake to secure the industrial and commercial development of all its resources. This would include the broad field of the development of the welfare of the country, the making of thorough geological, botanical, and other surveys of the land, to discover and to open up the vast wealth of its natural resources in its mines, forests, fields, waterfalls, etc. ; the establishment of experiment stations to test the usefulness of new crops and fruits ; to study means for making all crops more bountiful, the improvement of stock, and the introduction of new kinds; the preservation of the country's wild animals, game, and fishes; the stocking of our forests and waters with game and fishes of improved quality; and, what is of more importance than all these, the care and improvement of the human race, mentally and physically; or, to sum it all up, the conservation and improvement of all the gifts of divine Providence.

A REAL AMERICAN SYSTEM

The true American doctrine is that of equal opportunities to all, so far as legislation is concerned, with no special privileges granted to any by legislation.

MEANING OF " PROTECTION " AS OPPOSED TO " FREE TRADE V

The word " protection " is used in a very different sense, a much narrower one — one, indeed, that means the exhaustion, instead of the conservation, of such of our natural resources as it has succeeded in bringing under its blighting influence. As opposed to free trade, it means the protection (a) of the capitalists engaged in manufacturing, mining, etc.; (K) of the laborers engaged in the mills, machine shops, mines, etc., of these capitalists; or (c) of the consumers of their products. The latter may be dismissed at once from further consideration, for it cannot be claimed that consumers get any protection under this ki< d of protection. According to the unexpressed ideas of protectionists, they exist for the purpose of being exploited by the producers.

Protection for the benefit of the capitalist producers, or for the benefit of the laborers employed in such production, or for the benefit of both, is claimed to be secured through duties on manufactured or raw products brought into this country from other countries, the ostensible object of these duties being the raising of revenue with which to meet the expenses of government. But these two objects are antagonistic and inconsistent, for if duties are high enough to protect, they yield little or no revenue, while if they are low enough to yield revenue, they fail to protect. Protectionists answer this by citing the large sum produced by the tariff, running up into hundreds of millions of dollars, while the very existence of this large sum is cited by other protectionists, especially by those wanting protection who have not yet got it, as proof that the duties are not yet high enough to keep out foreign goods. What they want is not protection, but prohibition. The history of the tariff is, therefore, a history of the struggle between those who want a tariff for revenue (which, as we shall see, is free trade) and those who want a tariff for protection, even prohibition if necessary, to keep out foreign goods; and of the legislation enacted for the purpose of bringing about one or the other of these results.

MEANING OF " FREE TRADE" AS OPPOSED TO " PROTECTION"

Like the word " protection," the words "free trade" have many meanings. Primarily, they suggest freedom, the opposite of slavery, i. e., liberty, the right to trade as one wills, without restraint or limitation. Such a conception of free trade is in keeping with our free institutions and with all the great principles of freedom of the Anglo-Saxon blood — a part of the very being of Englishmen and Americans, like free speech, a free press, free schools, a free ballot, a free church and churches. In the abstract, free trade is the application in economics of the principle of the freedom, the right, the liberty, of every member of the community to carry on any legitimate business as he pleases, with freedom to buy in any market and to sell in any market, free from interference. This is absolute free trade;

not, however, the free trade that is found anywhere between states, except within the United States. It is incompatible with the existence of a custom house where duties are collected upon imports to furnish funds for the expenses of government. We find, therefore, that the words " f ree trade" are used politically in a very different and much narrower sense. As opposed to protection, free trade means trade or commerce subject only to such duties on imports at the custom house as are necessary to raise revenue for the expenses of government; as opposed to that system, known as protection, that imposes duties on imports ostensibly to raise revenue for the expenses of government, but in reality to stimulate home production and to diminish, and finally to put an end to, the importation of such imports.

That eminent authority, David A. Wells, who began public life as an ardent protectionist, but who became a more ardent free trader, as the result of his practical experience and greater knowledge, defined free trade as the right of every man to exchange freely the products of his labor and services in such a way as may seem to him most advantageous, subject only to such restrictions as the State may find it necessary to impose for the purpose of revenue or to maintain the public health. Conversely, he defined it as the denial of the right of a free government to take arbitrarily from anyone any portion of the product of his labor, services, or skill, for the benefit of another, without making compensation therefor.

The following definition is acceptable to free traders, and as it comes from a representative protectionist of high standing, it should also be acceptable to protectionists. I quote from the Philadelphia American of August 7, 1884:

The term free trade, although much discussed, is seldom rightly defined. It does not mean the abolition of custom houses. Nor does it mean the substitution of direct for indirect taxation, as a few American disciples of the school have supposed. It means such an adjustment of the taxes on imports as will cause no diversion of capital from any channel opened or favored by the legislation which enacts the customs. - A country may collect its entire revenue by duties on imports and yet be an entirely free trade country, so long as it does not lay those duties in such a way as to lead anyone to undertake any employment or make any investment he would avoid in the absence of such duties. Thus, the customs duties levied by England, with a very few exceptions, are not inconsistent with her profession of being a country that believes in free trade. They either are duties on articles not produced in England, or they are exactly equivalent to the excise duties levied on the same articles if made at home. They do not lead anyone to put his money into the home production of an article, because they do not discriminate in favor of the home producer. It is, therefore, no concession to the protective principle when the Democratic platform says that " since the foundation of the government, custom house duties have furnished its main source of revenue " and " this system must continue/' A protective duty, on the other hand, has for its object to effect the diversion of a part of the capital and labor of the people out of the channels in which it would run otherwise, into channels favored or created by law.

I use the term " free trade " in the same sense that protectionists use it in when they say that England is a free trade country. The trouble with them is that they do not stick to that sense.

INSTANCES OF WANT OF UNDERSTANDING THAT FREE TRADE MEANS A TARIFF FOR REVENUE ONLY

In a speech before the Senate, April 29, 1909, Senator Rayner said:

The Senator from Rhode Island, in a brief discussion that took place a few weeks ago over the practice that obtained before the finance committee, boldly stated in this presence that a tariff for revenue and free trade were identically one and the same thing. This is the first time that I have ever heard the proposition thus announced. I have never come across a passage upon the pages of political economy; I have never heard a practical expert or statistician treat the subject from this standpoint. I have always considered that free trade between this country and other countries meant the abolition of custom house duties, and, if I am permitted to say so, I think that the Senator confuses fair competition with free trade.

What a strange state of mind this shows ! Here is Senator Aldrich, the great leader of the high protectionists, always ready to raise a duty, who admits (correctly) that free trade means a tariff for revenue. On the other hand is Senator Rayner, a Democrat, opposed to protection, who has never heard that a tariff for revenue and free trade are identically one and the same thing ! It would be no more astonishing had he stated that he had never heard that England is a free trade country!

In 1883 J. G. Carlisle had not grown to an understanding of the term "free trade." He said:

In the broad and sweeping sense which the term usually implies, I am not a free trader. I will add that in my judgment it will be years yet before anything in the nature of free trade would be wise or practicable in the United States. When we speak of this subject we refer to approximate free trade which has no idea of cutting the growth of home industries, but simply of scaling down the inequalities of the tariff schedules where they are utterly out of proportion to the demands of that growth. After we have calmly stood up and allowed monopolies to grow fat, we should not be asked to make them bloated. Our enormous surplus revenues are illogical and oppressive. It is entirely undemocratic to continue these burdens on the people for years and years after the requirements of protection have been met, and the representatives of these industries have become incrusted with wealth.

Even Stanwood, clear thinker and exact writer as he is, sometimes seems confused in his use of the term free trade. Thus (Vol. 2, p. 210)* he says, correctly, "The revenue reformers, or free traders, were aggressive, patient, persistent, . . ." etc. Again (p. 227), he says, correctly, ". . . free trade, that is, to a system of tariff taxation which not merely does not give i incidental protection,' but is contrived with the express purpose of excluding protection." But at the foot of page 229 he says,

11 Now they were, in following the recommendations of the President, to base their action upon the stock arguments, the only logical conclusion of which was absolute free trade." Herein he is entirely in error and confused in thought. No free trader (meaning one who believes in a tariff for revenue only) is an absolute free trader, nor does he seek the abolition of our custom houses. An absolute free trader is one who would abolish all custom houses, and, therefore, he does not believe in a tariff for revenue only — he would have no tariff at all, no revenue from a tariff. The position really held by free traders (meaning those who believe in a tariff for revenue

* American Tariff Controversies in the Nineteenth Century.

Definitions II

only) cannot be better expressed than in StanwoocTs own words (p. 23 1 ) , " The theory which he and his party associates held, that the tariff must be reduced in the interest of the great body of the people, and with no other tenderness for the so-called rights of manufacturers than was necessary to avoid a too abrupt and injurious change . . ."

MEANING OF A TARIFF FOR REVENUE WITH INCI- DENTAL PROTECTION

A tariff for revenue with incidental protection is one based upon the supposition that, by arranging a scale of duties so moderate as only to restrict and not to prevent importation, it is possible to secure revenue for the government and to stimulate domestic manufactures at the same time by thus raising the price of competitive foreign goods. This double object is undoubtedly possible, but it is one of the most costly of all the methods of raising revenue. For, while revenue to the government accrues only from the duties levied and paid on what is imported, another and a much greater tax is paid by all the consumers of the country on the domestic products thus " protected," sold, and consumed in place of the foreign products thus kept out of the country. It is attended by the further disadvantage that as imports are thus kept out of the country exports of our own products are kept in the country; for commerce or trade between the merchants of different countries consists in the exchange of goods, products, etc. There cannot be exports unless there are imports; there cannot be imports unless there are exports. We cannot become great exporters unless we become great importers. When we shut out foreign products we shut in home products. The same Chinese wall, the tariff, that keeps out foreign goods keeps in home goods. A tariff for revenue so adjusted as to afford incidental protection is, therefore, a system that requires all consumers — that is, the whole people — to pay much in order that the government may receive a little. The difference is an extra profit pocketed by the manufacturers or the protected interests, or it is so much less loss than the inefficient among them would otherwise suffer if their business be of such a nature that it could not be carried on profitably without protection except through high efficiency. Again I repeat the term " free trade is used in two different senses. It may mean absolute freedom of trade (and the closing of all custom houses) or it may mean the opposite of protection, i. e., customs duties, properly levied, for revenue only. I repeat this because protectionists will persist in using the term sometimes in one sense, sometimes in the other sense, and sometimes, when unusually perverse, they use it in both senses at the same time.

This tendency of protectionists to use the term

" free trade " with a wrong meaning is illustrated by what Representative Fairchild of New York said in a speech in Congress, February 14, 191 1, "Scratch the skin of the average 'tariff for revenue only' Democrat and you will find the blood of a free trader." Here we see the sophist confounding the real meaning of the words he uses, probably purposely, in order to arrive at a result that he must know is false. If he does not know it, he ought to. The tariff for revenue man is a free trader, be he a Republican or be he a Democrat; the free trader is a tariff for revenue man, be he a Democrat or be he a Republican.

In a speech in 1882 Senator Frye of Maine said:

I am a protectionist from principle. If there were no public debt, no interest to pay, no pension list, no army and no navy to support, I still should oppose free trade and its twin sister, tariff for revenue only, and favor protective duties.

One may excuse a good deal as the mere exuberance of unpremeditated oratory, but one does not expect to meet such ignorance in an educated United States Senator.

Let it not be forgotten that revenue through customs duties is received only as foreign goods are let in, while protection operates only in so far as foreign goods are kept out. The two are antagonistic, not part of one whole.

MEANING OF A TARIFF FOR REVENUE ONLY

A tariff for revenue only is a tariff so framed that the government shall receive all the duties paid by the people and that no money in the form of increased prices because of the tariff, shall be paid by consumers to producers. If duties are high enough to stop imports, no revenue is received by the government, yet consumers pay nearly the same high prices for all the home products they buy as if they were all imported and paid the duties. So the consumers pay nearly the same sum as the duties (besides the real cost of the goods), but to the producers and not to the government. All duties on imports should now gradually be so fixed as to yield the greatest revenue to the government. It frequently happens that a reduction in a duty brings about an increase in revenue, the larger amount imported in consequence of the reduction, more than making up for the loss through the lower rate. The problem of the American statesman today is to keep on gradually reducing the duty so long as the revenue therefrom increases in amount. When duties gradually reduced bring less revenue, then the rates are too low (if the object be to produce the largest revenue possible). When there is a surplus, duties may be so far diminished as to stop any increase of surplus.