Tariff Stupidity: Lessons from History

Stupid US history specifically...

MOST aspects of Bad Economic Nationalism have to do with Tariffs, writes Nathan Lewis on his New World Economics blog.

Tariffs were a core component of tax systems in the past, whether the Federal Government of the 19th century, or the British government of centuries prior to that. Their important revenue role was largely surpassed by the development of alternative taxes, in particular the Income Tax (1842 in Britain), the Retail Sales Tax, and the VAT.

You might also include the Payroll Tax, although that is typically conceived as a direct funding mechanism for socialistic programs such as Social Security, rather than as some funding alternative to Tariffs.

Tariffs have been part of some pretty big disasters over the years, so let's look at what they were.

In US history, the biggest disasters were the Civil War and Great Depression, both of which had Tariffs as a core component.

These days, there is a certain group of Southern intellectuals that perhaps want to overstate the importance of Tariffs in the outbreak of the Civil War. Let's be clear: I think the main reason for the Secession of the Southern States, and consequently the Civil War, was not Tariffs, but of course Slavery, in particular the question of the expansion of slavery in new States beyond the original 13 Colonies, that took place in 1789-1860.

In the original Constitution, a compromise was enacted where importation of new slaves would be eliminated in twenty years, or 1808. At the time of the signing of the Constitution, it was thought that this would lead to the eventual elimination of slavery entirely.

However, it didn't work out that way. Slavery continued after 1808, and actually expanded in the original Southern States. From 1.2 million slaves in 1810, there were 4.0 million in 1860. Then, the addition of new States also brought with it the expansion of slavery beyond the original Southern Colonies.

This was a disaster. It led to the creation of the Republican Party to stop it, and Abraham Lincoln as president, who came to prominence in the Lincoln/Douglas debates, regarding slavery in the new States. Not tariffs.

You can read about it in any decent volume of American History. Since most general books of American history these days are pretty suspect, or are outright garbage, I recommend only two: A History of the American People, by Paul Johnson; and A Patriot's History of the United States, by Schweikart and Allen. Most histories from before 1910 will be good too.

But tariffs nevertheless played a part in the Civil War. Lincoln's electoral victory was not only a major step forward for blocking the expansion of slavery in the new States, it also made certain the passage of the Morrill Tariff, an increase on tariffs, which was passed in March 1861, immediately upon Lincoln's inauguration.

Lincoln passed two more Tariff increases during his term, largely to finance the war. After the Southern States seceded and declared themselves independent, there was a sort of standoff. The Southern States naturally didn't want war with the Union if they could avoid it. Peaceful secession worked for them. The Union didn't recognize the secession, but they didn't do much about it, at first.

The flashpoint, as we know, was an attack at Fort Sumter, in South Carolina.

Why South Carolina? This was nowhere near the North/South border. Why Fort Sumter? Fort Sumter was a fort built on an artificial island, in the harbor of Charleston. It was a Federal military post, and controlled ship travel through Charleston. One of its purposes was to enforce the collection of Federal tariffs, on trade through Charleston. Since the Federal government didn't recognize Southern secession, naturally it continued to oversee ship trade, including the collection of Federal tariffs.

Tariffs on manufactured goods mostly advantaged Northern manufacturing interests. They were able to charge higher prices on customers in the South, being protected from lower-cost foreign competition. Southern businesses were mostly engaged in agricultural production (chiefly cotton), which they exported to other countries via harbors such as Charleston.

The Federal government of course did not charge tariffs on exports. But, other countries, facing Federal tariffs on exports of their goods to the United States, naturally reacted with tariffs on US imports, primarily cotton. A Southern exporter might naturally see a European cotton tariff as a consequence of US import tariffs – especially since the European governments probably stated explicitly this was so.

It is an exaggeration to say that the Great Depression was caused by the Smoot-Hawley Tariff of 1930, which gained a majority in Congress in September 1929, thus facilitating its passage. By itself, it would have probably led to a recession, but not a Great Depression. But it inspired a worldwide burst of retaliatory tariffs, inflaming a worldwide trade war. In the economic downturn that followed, mostly conservative governments worldwide, facing a falloff in tax revenue, reacted with a burst of domestic spending combined with a burst of higher domestic taxes to pay for it.

This in turn led to an explosion of monetary chaos with the British devaluation of September 1931, and destructive socialistic attempts to deal with the disaster, such as Roosevelt's National Industrial Recovery Act of 1933.

What a catastrophe. And, the initial error, that brought to an end the amazing 1920s technological expansion, was Tariff stupidity.

One reason for the Republicans' embrace of the Smoot-Hawley Tariff was the notion that a higher Tariff was good for business. It obviously worked as a protection for US businesses; although customers of those business would likely face higher prices. But, the retaliatory tariffs worldwide were certainly bad for US exporters.

With Tariffs involved in two of the biggest disasters in US history, and indeed the whole world regretting its tariff warfare and endeavoring, in the World Economic Conference of 1933, to reduce tariffs worldwide and return to something like a pre-1929 status quo, tariffs became the Third Rail of US economic policy and even worldwide economic policy. A trend toward Free Trade began at the Bretton Woods conference in 1944 (which included a plan for an International Trade Organization to prevent the kind of retaliatory Trade War that everyone then knew had caused all kinds of problems), and which continued in various forms afterwards.

To these historic disasters, we can add the day-to-day complexity and difficulty of administering hundreds of tariffs, at different rates. Each tariff, and each rate, became a topic of political contention, not only involving Congress, but also foreign governments and the diplomatic service.

It was tolerable – arguably – when, in the primitive state of mid-19th century taxation, there didn't seem to be much alternative. But in the 20th century, as tariffs became a negligible revenue source, all this excess complexity and contention became a needless burden, a swamp of difficulty to be avoided via broad Free Trade Agreements, and the like.

Currency devaluation is not so much a part of the Economic Nationalist agenda today, but it had an important role in the past. We will look at Currency Devaluation as a component of Bad Economic Nationalism soon.