Modern Economic Problems Part 17

The peculiar advantages of a new country attract labor and enterprise into a few lines. Industries are forced into an earlier diversification by tariffs. Which is the better economic situation?

Contrast Iowa, Dakota, and Minnesota, or Kansas, if you please, with New York and Pennsylvania. Is it so certain that a dense population congested in cities and crowded in factories and mines is a more ideal social aggregation than is a community of prosperous farmers? The smoky industrialism fostered by protection often puts a premium on a low grade of immigrants, crowds then into city slums and into forlorn mill towns, and keeps them aliens to the American spirit. It would be surprising if Americanism on the Western plains were not as sound as in the crowded cities. But the infant-industry argument appeals strongly to the enterprise and the speculative spirit of Americans, who like to do all things rapidly and on a large scale. Every village aspires to be a great industrial center. Americans are impatient of the suggestion that things "will come in time"; they like things to come at once.

It must, however, be recognized that in a new country there is often a certain monotony and poverty of life because of the lack of diversified industries. There are not sufficiently varied avenues for the expression and use of the manifold talents of the nation. There are unused materials and opportunities, but the initial expense of experimentation, the initial difficulties of gathering and training a working force, are discouraging to individual enterprise, prices being as they are. A protective tariff is not necessarily and always the best way, but it is one way of helping private enterprise to establish and conduct such industries through their initial period. But as has been pointed out by many writers, the infant-industry argument is self-limiting, and involves always the a.s.sumption that the industries selected as fit for protection are such as ultimately, and within a moderately short period, can grow into self-dependence. The infant must sometime grow to be a man and stand on his own legs, or he is either a chronic invalid or a degenerate.

#-- 5. The home-market argument.# The home-market argument seeks to show a more permanent need for a tariff. At the same time it appeals to the farmers, whom it has been hard to reconcile to a policy which in America[2] has been peculiarly favorable to manufacturers. The home-market argument extols the advantages of having near to the farms customers for agricultural products, and dwells on the greater steadiness of domestic trade. War or political changes, it is said, may change the demand for products. This is true, but no other changes have affected American agriculture so radically as the peaceful development of domestic transportation and the opening of the West.

The main economic claim made in the home-market argument is that the shipping of food to Europe and the importing of manufactures involve a great cost for double freights which could be saved by manufacturing at home. The farmer is supposed to pay this cost. The obvious defects in this view are: first, there is nothing to show that the freight is not partly or entirely paid by the European, either the manufacturer or the food consumer; secondly, home trade "saves the freights" for the farmer only in case he can buy goods under a tariff with less of his own labor and products than under free trade. The payment of freight charges is true economy when the goods can be bought at a distance on more favorable terms than near home. The freight argument attempts to prove too much for it condemns every trade within the country, of goods produced a stone's throw away from the consumer.

The home-market appeal is strongest when addressed not to all farmers, but to one cla.s.s of farmers, those whose lands are situated nearer the manufacturing cities. As city population grows, some land is converted from the extensive cultivation of corn and wheat to dairying, fruit- and market-gardening in the neighborhood of cities, and perhaps at length is used for factory sites or as city lots. There is, thus, a partial validity in the argument as applied to a comparatively small number of farmers, who gain as landlords, not as tillers of the soil.

Even greater gains have sometimes been reaped by the owners of timber lands, ore mines, coal lands, and other natural resources, the values of which have been raised by tariff legislation. But unless these gains come from truly productive additions due to the tariff, there is no benefit to the community as a whole.

#-- 6. The "two-profits" argument.# Somewhat related to this idea of the saving of two freights is the "two-profits" argument. It is said that the tariff keeps "two profits" at home, foreign trade gives but one. The word "profits" is here used in the popular sense of gain from a single transaction. Both parties are said to profit and both profits are thought to be secured at home when two citizens are forced to trade with each other. The view that there are "two profits" in a trade is an advance upon the notion that "one man's gain is another's loss,"[3] but there is an error in elementary arithmetic here, both as to the number and as to the aggregate amount of profits. The purpose of a protective tariff is to compel two of the citizens of a country to trade with each other instead of trading with two citizens of a foreign state; the number of profits made by each country is therefore not increased by subst.i.tuting domestic for foreign trade.

What, then, as to individual size and aggregate amount of the profits?

The gain is not the same in all trades; the trade is made if there is a gain to each party, no matter how small it is; but the generous "profit" on one transaction where the conditions of the two parties are very different may be greater than the total of petty gains on a dozen trades between two traders of evenly matched powers. Indeed, the greater the difference in the conditions and the capacities of two groups of traders, the greater is the sum of the profits which they may secure through the members of each group trading with those of the other, rather than by the members of each group trading only among themselves. Can it safely be a.s.sumed that every trade with a foreigner is less advantageous than one with a fellow-citizen? Diamond cuts diamond, but two Yankees left to themselves surely should not be worsted in bargains with the universe. If they could exchange to better advantage with each other they probably would discover it as soon as the interested manufacturers and political orators who can prove so eloquently that they know the other man's business better than he knows it himself. Forcing the home trade by making our citizens trade with each other whether both wish to or not may be to the advantage of one citizen, but it is not likely to be to the advantage of both citizens.

-- 7. #The balance-of-trade argument.# At the foundation of nearly all belief in the virtues of a protective tariff will be found the "favorable balance-of-trade" notion. The ideal of the more thorogoing upholders of a protective policy is to keep merchandise consistently flowing out of the country, and to have nothing come in--in any case, nothing that by any fair amount of effort (whatever that be) could be produced at home. This is called maintaining a "favorable balance of trade." Sometimes the emphasis is more on the advantages of an excess of exports of goods, sometimes more on the importance of the need "to keep money at home." The simple error in these opinions is clearly apparent in the explanation of foreign exchanges and of the principles regulating the international flow of money.[4]

An interesting commentary on the opinion before us is the fact already noted[5] that an excess of exports is the usual situation in poor debtor countries having constant interest payments to meet; while, on the contrary, rich creditor countries have an excess of merchandise imports.

The "favorable balance-of-trade" argument, with the emphasis on money rather than on goods, is that the protective tariff keeps money at home which, if trade is free, will be sent abroad to buy foreign goods, thus impoverishing the country. This doctrine as presented in the seventeenth and eighteenth centuries in Europe, was known as _mercantilism_. It had great influence upon the commercial policies of all the great European nations. A superficial glance at the trade relations of an old, rich country with a new province seems to give evidence for such a belief. A richer country that is lending capital (sent to the debtor country in the form of goods) has at the same time a larger supply of money. The lack of money and the poverty of the newer country are looked upon by the protectionist as due to the importation of goods. The common cause of the imports to newly settled districts and of their scanty stocks of money, it need hardly be repeated here, is the comparative poverty of settlers and pioneers.[6]

Often these are paying for imports by means of loans, and in any case their monetary stocks are not decreased either by their foreign trade or by their domestic trade with the older and richer parts of the same country. Europe and the United States, in their trade with China and South America, usually do not get gold in exchange, but merchandise of various sorts. It is true that in the trade of England and New York with great gold-producing districts, such as California, South Africa, and Alaska, gold is received in return for merchandise, for much of the gold in gold-producing districts is merely merchandise, and its export does not drain them of their due portion of money. There was a time when the states of Kansas, Nebraska, Iowa, and their neighbors were filled with resentment against the money-lenders of the Eastern states. There was a widespread belief that hard times were due to an insufficient currency.[7]

Attempted action took the form of the greenback and free silver movements, which were defeated by the opposition of the East, but there can be little doubt that if the Federal Const.i.tution had not forbidden it, the discontented states would have established a protective tariff "to keep their money at home." Few advocates of protective tariffs are ready to admit that the money stock of the country is dependent on the general wealth of the country and on the methods of doing business, rather than on a protective tariff.

-- 8. #The claim that protection raises wages.# The most effective popular claim made for protection is that it raises, or maintains, the general scale of wages in the country. This argument takes two forms: first, when wages are low in a country it is claimed that a tariff is needed to raise them; and, secondly, when wages are high it is argued that a tariff alone can preserve them. In Germany the fear is of the higher paid and more efficient labor of England. In America, where general wages at all times have been higher than in England, it was first argued (in the time of Henry Clay) that because of the greater cost of production, due to high wages, the tariff was needed to start certain industries; but after the tariff had long been established and the old argument had been forgotten (ever since 1865), it has been urged that the tariff, being the cause of high wages, must be maintained to protect against the "pauper" labor of the older countries. The higher wages in new countries where a tariff exists are always claimed to be the fruits of a protective policy. The true cause of the high general scale of wages in America is the greater efficiency of industry under existing conditions.[8] Labor is surrounded here with advantages in the forms of rich natural resources and of mechanical appliances such as never before were combined.

Because of the scarcity of workers in particular protected industries, wages may be temporarily higher in them than in some other industries; but such workers form a small fraction of the population, and it is impossible to show that the general scale of wages in all occupations is raised by the tariff protecting this fraction.

There is, of course, no question that every tariff change affects certain enterprises and cla.s.ses of workmen. Enterprisers already acquainted with and engaged in a business always may hope to gain by the higher prices immediately following a rise in the tariff rates on their particular products. Though they are granted no enduring monopoly by the protection, they for a time enjoy the advantage of being on the ground, and may reap the first fruits of the favoring conditions. The enterpriser usually profits when the price of his product suddenly rises. Usually skilled workmen are affected slowly by compet.i.tion when there is any considerable increase of prices in their special industries. The important question is, Who bears the burden of the higher prices that result from a tariff? The burden is very soon distributed. A part of it may be for a short time borne by the retail merchants, but ultimately nearly the whole of it must be borne by their customers, the unfortunate, less favored citizens. The weight falling on each is usually small, often unsuspected, always hard to measure. The increased benefit is concentrated in a few industries and accrues to a comparatively few producers. Here is a recipe for riches: get everybody to give you a penny; it's so little that no one will miss it, and it will mean a great deal to you. Something like this happens in the case of many protected industries; every consumer of the article pays a few cents more, a small group of wage-earners temporarily gains, and a few enterprises wax wealthy.

-- 9. #Tariffs and unemployment#. The claim that a low tariff is bad for the workers is made with peculiar success in any period when unemployment is greater than usual. It is vain in reply to show that again and again equally bad periods of unemployment have occurred when a high tariff was in force, and that often the most highly protected industries are most affected. It is vain to suggest that fluctuations of unemployment are related rather to the rhythm of industrial cycles and panics, than to any particular level of the tariff, whatever it be.[9] The fact that at the moment is seen is that here are some men for the time out of work, and here are some foreign goods coming in.

Of course, what is not seen is that if we stop importing goods we thereby eventually will stop the exportation of goods of equal value now being sent in payment and this must throw as many men out of jobs as we helped into jobs by raising the tariff. But the view easy to take is the short view, and the ulterior consequences seem to the popular mind to be vain imaginings.

-- 10. #Exports and exhaustion of the soil#. It has been ingeniously argued that a tariff may keep some of the natural agricultural resources of a new country from becoming quickly exhausted. The export of food takes out of the soil and out of the country fertile qualities never to be returned. The shipment of several hundred million dollars of food products year after year represented a tremendous drain from the soil of the United States, but this has now largely ceased.

The a.s.sumption, however, that the use of the food in this country preserves the fertility of our own fields is in the main mistaken. The fertile material in the food for human consumption hauled to a town five miles away from the field is almost as entirely lost as if it were shipped to Europe. Engineering skill has as yet succeeded in returning economically to the fields from which it comes hardly a fraction as much fertile organic matter as that which flows into the sewers, that is dumped into river and ocean, and that is buried in heaps at the borders of our own cities. Artificial fertilizers are increasingly used, to be sure, but they are obtained in other ways.

On the other hand, the increased use of iron, coal, and timber, as a result of encouraging manufacturers, has very effectually hastened the exhaustion of the natural resources of the country.

-- 11. #Protection as a monopoly measure#. It has rightly been observed that a new country has a limited potential monopoly in certain kinds of products and that a tariff may make it effective. The rapid opening up of America with its rich natural resources greatly benefited the average consumer in Western Europe, altho it caused a loss to a special cla.s.s of landowners.[10] Whether the citizens of the older or of the newer country shall reap the greater benefit in the trade depends on the reciprocal demand for the two cla.s.ses of goods, as was seen in discussing the equation of international demand. A wide margin of advantage may go to one party and a narrow margin to the citizen of the more favored land. To put it concretely: America, having great natural resources for agriculture, might continue to trade food for manufactured goods even tho England reaped most of the benefits of the trade. An American tariff on manufactures from England would, under such conditions, check the demand for English products and compel some Americans to leave farming. This reduction of the American supply of wheat or corn and of the American demand for English manufactures compels a new ratio of trade (expressed in prices). It is conceivable that trading fewer goods with a larger gain on each trade would give a larger total of gain to the favored nation. Thus, foreigners may conceivably be compelled to pay a part of the tariff duties to enjoy the favored market. This is but a special case of the monopoly principle; the government by law artificially limits the supply of goods offered by its citizens.

This argument is somewhat subtle, but probably is the soundest one in the theory of protection. The supposed conditions seldom occur in a marked measure, but they may exist, and probably have existed in America. When the great system of internal transportation was developed in the United States before that of the other new countries (say from 1840 to 1894), this country had such peculiar advantages for the production of food that the quant.i.ty was enormously increased and agricultural prices fell.[11] At such a time the tariff may have worked toward checking the fall and earlier reestablishing a more favorable ratio. It did this by making prices of manufactured goods in this country artificially higher and thus tempting men from rural to urban callings. But the limited application of the principle must be recognized. The potential compet.i.tion of undeveloped countries on all sides, seeking to develop their resources, and profiting by the higher prices of food in the world-market caused by our tariff, threatens the peculiar advantages of the favored land. Russia, Argentina, and Australia have rapidly taken the place of America in supplying food to Western Europe, in part, no doubt, because we refused to take Europe's goods in trade. A great nation with its manifold interests is not eminently fitted to practise the gentle art of monopoly.

The period in America from about 1840 to 1890 shows certain absurd contradictions in economic policy. By governmental action, national, state, and munic.i.p.al, enormous grants of money and lands were made in aid of transportation. Ca.n.a.ls, roads, and railways were built into new agricultural territory far faster than was healthy and normal. A prodigal land policy put a premium upon a wastefully rapid extension of the farming area. These things were done to favor the agricultural states, but agricultural prices fell so greatly that our farmers for a long period were nowhere prosperous, and great numbers of them, both in the East and in the West, were ruined. At the same time a high tariff on nearly everything the farmers needed to buy was the political spoil obtained by the Eastern and Middle states. This further depressed the condition of the farmers and forced them or their sons into urban industries. A slower development would have occurred without the waste of national resources in such conflicting policies of artificial stimulation.

-- 12. #Harm of sudden tariff reductions.# It is rarely appreciated how great is the tactical advantage which the advocates of a high tariff enjoy in popular political discussion. They can so easily impress the popular judgment with the evident fruits of their own policy and with the immediate dangers of the policy of their opponents. When a protective rate is first applied or is increased, it calls into existence something visible and tangible, which can be measured in terms of factories built, men employed, and products turned out. The increased cost of these results is diffused among many consumers and reaches them in such indirect ways and in such small increments of price that they are quite unaware of the way they are affected.[12]

On the other hand, reduction of the tariff works in a direction the reverse of the enactment. It may cause local crises and may even bring on general crises. The benefits of the lower prices are diffused and lost to view; the immediate injury is concentrated and strikingly evident. Factories are closed, investments depreciate, laborers are thrown out of employment. The organic nature of local industry causes these evils to be felt by many cla.s.ses. Merchants, professional men, servants, and skilled laborers, that are tributary to the depressed industry, suffer. The effects are transmitted to commercial and financial centres and often credit is much shaken. Then follows a slow and painful process of readjustment.

The low-tariff advocates in America undoubtedly have underestimated these immediate effects. They have been too abstractly doctrinaire, have argued too absolutely for the merits of free trade to be applied instantly regardless of the existing distribution of investments and of occupations. They have opposed one extreme system by another, with no thought of the inexpediency and injustice of sweeping changes.

There is a strong feeling among business men that any tariff, be it high or low, is better than a shifting policy. Despite the great preponderance of domestic production over foreign trade, it is perhaps too much to say that the tariff is unimportant in our present conditions. It can, however, be truly said that business can adjust itself in large measure to any settled conditions and that radical changes, especially sudden and large reductions, are fraught with evils. Long before a new tariff law goes into effect, even months in advance of its pa.s.sage, while it is merely in prospect, the course of trade is abnormally affected. If the rate is likely to be raised, large importations take place under the lower rate, and for a considerable time after the law goes into effect imports are small, while prices rise and domestic production gradually increases. But if the rate is likely to fall, importations are for months meager, stocks of goods are reduced to the lowest point, and when the lower rate goes into effect, large importations follow to the injury of domestic producers. In many cases a year or two of notice, time given to enterprisers to adjust their business, would probably do away with a large part both of the serious losses and of the lottery-like gains that otherwise occur.

The obvious measure of precaution and of justice would be to put any new rate into effect gradually.[13] The difficulties are of a political nature and in the desire of the party in power to "make a showing" at once of the results of its campaign pledges, in the one case by starting and stimulating industries through a higher tariff and in the other by reducing prices to consumers through a lower tariff. Under the new permanent tariff board, const.i.tuted to suggest tariff changes and to administer the tariff laws, it would be possible to apply some such feature.

[Footnote 1: See above, ch. 2, secs. 12, 13.]

[Footnote 2: In European countries, on the contrary, the rates that have been mainly effective have been those levied upon food products, and the agricultural landholders have been the "protected interests,"

such as the England "landed aristocracy," the German agrarian "Junkertum," and the French peasant landowners.]

[Footnote 3: See above, ch. 13, sec. 2.]

[Footnote 4: See ch. 4, sec. 6 and ch. 13, secs. 6-10.]

[Footnote 5: In ch. 13, sec. 7.]

[Footnote 6: See ch. 4, secs. 4 and 9.]

[Footnote 7: That there is a certain measure of truth in this opinion is recognized in our discussion of the standard of deferred payments, ch. 6, sec. 9. But the relation of a world-wide appreciation of the standard money commodity with the burden that this change puts upon debtors has nothing to do with the question now before us, viz.: Does a protective tariff enable a country to keep and increase its proportion of the world's stock of gold; and if it could, would it be a general benefit?]

[Footnote 8: See Vol. I, especially p. 228, and chs. 34 and 36.]

[Footnote 9: See on wages in times of crises, ch. 10, secs. 6 and 7; and on tariff changes, ch. 10, sec. 14, and ch. 15, sec. 13.]

[Footnote 10: See Vol. 1, pp. 361 and 443.]

[Footnote 11: See Vol. 1, p. 436, for average wheat prices in England, practically in the world-market.]

[Footnote 12: See above, sec, 8. On the next paragraph, see ch. 10, sec. 14.]

[Footnote 13: For example, the maximum alteration in any year might be limited to 3.65 per cent of the value of the goods and in any case not to exceed one tenth of the old duty, this change to be applied day by day. Thus, if, on a valuation of $1000, the duty collected under the old rate has been $400, and under the new law is to be $290.50, three years would be required for the full change to become effective, the reduction each day being $.10 per $1000 valuation. The administration of such a rule would be simple, and it has been favored by men of practical commercial experience.]

CHAPTER 15

AMERICAN TARIFF HISTORY

-- 1. Prevalence of protective tariffs. -- 2. Specific and _ad valorem_ rates. -- 3. Some technical features of the tariff. -- 4. The tariff, 1789-1815. --5. The tariff, 1816-1845. --6. The tariff, 1846-1860. --7. The tariff, 1861-1871. -- 8. The tariff, 1872-1889. -- 9. The tariff, 1890-1896. -- 10. The Dingley tariff, 1897-1909. -- 11. Sentiment favoring lower rates. -- 12. The Payne-Aldrich tariff, 1909-1913. -- 13. The Underwood tariff, 1913. -- 14. Some lessons from our tariff history.

Note on Tariff legislation and business depressions.

-- 1. #Prevalence of protective tariffs.# For a century and a half most serious students of economics have favored a larger measure of freedom, if not absolute freedom, in foreign trade. But the actual practice of most nations has never been in accord with the principles laid down by the philosophers. Great Britain alone among the larger countries has, since 1846, steadily pursued a low tariff policy for revenue only, and her example has been most nearly followed by Holland and Denmark. Germany, which had always had restrictive duties, adopted still more protective measures under Bismarck in 1879. France, Italy, and most of the other nations of Europe have strong protective tariffs. The United States has followed a restrictive policy since near the beginning of the last century. The explanation of this contradiction between precept and practice is not entirely simple.

Great interests are affected by foreign trade and certain of these interests are able to influence opinion and to dominate legislation.

Free trade is not the most desirable thing for every one. The general policy of free trade between nations, as advocated by most English economists since Adam Smith, has usually been rejected by the people and the legislators of other countries.

In its details American policy in tariff legislation under the Const.i.tution has been varied and vacillating. The changes have been determined in most cases by motives of temporary partisan advantage or by the political activity of the immediate beneficiaries rather than by clear knowledge and consistent purpose of the electorate as a whole. Thus its lessons for the student are largely of a negative nature, but they well repay serious study.

-- 2. #Specific and _ad valorem_ rates.# Before entering upon the history of the American policy let us make clear the meaning of certain technical terms and explain certain methods which are frequently referred to.