Tariffs in American History

An Unsettling Story of  Economic Ignorance and Blind Greed

“Great is Diana of the Ephesians.”

George Washington signed the first U.S. Tariff bill in 1789 with an average tax on imports of about 5%. Tariffs ranged from about 6% to 15% until the Dallas Tariff in 1816 to repay the debt from the War of 1812. The Dallas tariff of 1816 was also a Protective Tariff to protect new American industry from foreign competition. Tariffs were considered the simplest, quickest, and least objectionable way to raise government funds. True enough for the time, but the “American System” of Economics and Tariffs turned out to be corruptible, because political leaders can be corrupt, partisan, and prone to shallow economic understanding. All human systems, including new AI systems, are subject to the human condition and its tendency toward self-centered moral blindness and hubris. Therein lie great dangers and potential disaster.

Prior to the U. S. “Civil War,” there was no U. S. income tax.  In 1860, approximately 95% of  U.S. government revenue was raised by a tariff on imported goods.  A tariff is a tax on selected imports, most commonly finished or manufactured products. A high tariff is usually legislated not only to raise revenue, but also to protect domestic industry form foreign competition.  By placing a high protective tariff on imported goods it makes them more expensive to buy than the same domestic goods. This allows domestic industries to charge higher prices and make more money on sales that might otherwise be lost to foreign competition because of cheaper prices or better quality  This of course causes domestic consumers to pay higher prices and have a lower standard of living. Tariffs on some industrial imports also hurt domestic industries that must pay higher prices for goods they need to make their products.

Because the nature and products of regional economies can vary widely, high tariffs are sometimes good for some sections of the country, but damaging to other sections of the country.  High tariffs are particularly hard on exporters since they must cope with higher domestic costs and retaliatory foreign tariffs that put them at a pricing disadvantage. This has a depressing effect on both export volume and profit margins.  High tariffs have been a frequent cause of economic disruption, strife and war. 

Prior to 1816. the average tariff level in the U. S. had been in the 15% to 20 % range. This was thought sufficient to meet federal revenue needs and not excessively burdensome to any section of the country.  The increase of the tariff to a 20% to 25% range in 1816 was ostensibly to help pay for the War of 1812.  It also represented a 26% net profit increase to Northern manufacturers.

In 1824, Northern manufacturing states and the Whig Party under the leadership of Henry Clay began to push for high, protective tariffs. These were strongly opposed by the South  The Southern economy was largely agricultural and geared to exporting a large portion of its cotton and tobacco crops to Europe.  In the 1850s, the South accounted for anywhere from 72 to 82% of U. S. exports. They were largely dependent, however, on Europe or the North for the manufactured goods needed for both agricultural production and consumer needs.  Northern states received about 20% of the South’s agricultural production. The vast majority of export volume went to Europe. A protective tariff was a substantial benefit to Northern manufacturing states but meant considerable economic hardship for the agricultural South.

Northern political dominance enabled Clay and his allies in Congress to pass a tariff averaging 35% late in 1824. This was the cause of economic boom in the North, but economic hardship and political agitation in the South.  South Carolina was especially hard hit, the State’s exports falling 25% over the next two years.  In 1828, in a demonstration of unabashed partisanship and  greed, the Northern dominated Congress raised the average tariff level to 50%.

Despite strong Southern agitation for lower tariffs, the Tariff of 1832 only nominally reduced the effective tariff rate and brought no relief to the South.  These last two tariffs—1828 and 1832—are usually termed in history as the Tariffs of Abomination.

This led to the Nullification Crisis of 1832 when South Carolina called a state convention and “nullified” the 1828 and 1832 tariffs as unjust and unconstitutional.  The resulting constitutional crisis came very near provoking armed conflict at that time. Through the efforts of former U. S. Vice President and U. S. Senator from South Carolina, John C. Calhoun, a compromise was effected in 1833 which over a few years reduced the tariff back to a normal level of about 15%.   Henry Clay and the Whigs were not happy, however, to have been forced into a compromise by Calhoun and South Carolina’s Nullification threat. The tariff, however, remained at a level near 15% until 1860. A lesson in economics, regional sensitivities, and simple fairness should have been learned from this confrontation, but if it was learned, it was ignored by ambitious political and business factions and personalities that would come on the scene of American history in the late 1850s. 

High protective tariffs were always the policy of the old Whig Party and had become the policy of the new Republican Party that replaced it. A recession beginning around 1857 gave the cause of protectionism an additional political boost in the Northern industrial states. In 1858, the Morrill Tariff (named for Republican Congressman and steel manufacturer, Justin S. Morrill of Vermont)m was submitted to the House Ways and Means Committee.

In May of 1860, the U. S. Congress passed the Morrill Tariff Bill, raising the average dutiable tariff from just under 20% to 37% with increases to 47% within three years. Because more items were covered, tariff revenues were approximately tripled. Although this was remarkably reminiscent of the Tariffs of Abomination which had led in 1832 to a constitutional crisis and threats of secession and armed force, the U.S. House of Representatives passed the Bill 105 to 64.  Out of 40 Southern Congressmen only one Tennessee Congressman voted for it. 

Only about 80% of foreign imports were dutiable at the time, which meant the effective overall rate was 16% in 1860. By 1862, the effective overall rate was up over 67% to to 26%. Note that the overall effective tax rate can be quietly increased by increasing the number of products covered. 

U. S. tariff revenues already fell disproportionately on the South, accounting for 87% of the total even before the Morrill Tariff.  While the tariff protected Northern industrial interests, it raised the cost of living and commerce in the South substantially. It also reduced the trade value of their agricultural exports to Europe. These factors combined to place a severe economic hardship on many Southern states.  Even more galling was that 80% or more of these tax revenues were expended on Northern public works and industrial subsidies, thus further enriching the North at the expense of the South. 

It is also important to note, for example, that if Nation ABC places an additional 10% tariff on $100 billion in imported goods from Nation XYZ, that does not mean the government of Nation ABC can count on $10 billion additional tax revenue. Nation XYZ exporters may decide to find more profitable markets elsewhere or quit dealing with Nation ABC altogether. They may also initiate retaliatory trade actions on Nation ABC with unforeseen consequences.  

Furthermore, tariff wars and tariff actions perceived as hostile or unfair tend to destabilize trade. Busineses and investors have a very strong preference for stability. Smart governments should also regard stable trade environments crucial to national prosperity and security.

Frank William Taussig, The Tariff History of the United States, first published in 1888, also warned that the effects of a tariff may not be immediately visible, especially to ordinary consumers.

Moreover, Article I, Section 8, of the U.S. Constitution grants Congress the power to levy taxes, including tariffs, and to regulate Commerce with foreign nations.

In the 1860 election, Lincoln, a former Whig and great admirer of Henry Clay, campaigned for high protective tariff provisions of the Morrill Tariff, which had also been incorporated into the Republican Party Platform. Thaddeus Stevens, the most powerful Republican in Congress and one of the co-sponsors of the Morrill Tariff, told an audience in New York City on September 27, 1860, that the two most important issues of the Presidential campaign were preventing the extension of slavery to new states and an increase in the tariff, but that the most important of the two was increasing the tariff. Stevens, a Pennsylvania iron manufacturer, was also one of the most radical abolitionists in Congress. He told the New York audience that the tariff would enrich the northeastern states and impoverish the southern and western states, but that it was essential for advancing national greatness and the prosperity of industrial workers.  Stevens, who would become virtually the “boss’ of America after the assassination of Lincoln, advised the crowd that if Southern leaders objected, they would be rounded up and hanged.

Two days before Lincoln’s election in November of 1860, an editorial in the Charleston Mercury summed up the feeling of South Carolina on the impending national crisis:

“The real causes of dissatisfaction in the South with the North, are in the unjust taxation and expenditure of the taxes by the Government of the United States, and in the revolution the North has effected in this government, from a confederated republic to a national sectional despotism.”

Facing a staggering increase in taxes imposed on them by the Northern majority in Congress, South Carolina and the Gulf cotton-producing states had no economic choice but to leave the Union. The Morrill Tariff was the consummation of more than 40 years of flagrantly unfair tax policies benefiting the North at the expense of the South and West. It was a major provocation to

Southern Secessions, which led to war. Border States also began to secede when Lincoln called for 75,000 volunteers to enforce the tariff and crush Southern resistance by guns and bayonets.

On November 7, 1861, the London Times refuted the Northern claim to “Saving the Union” or pretenses to fighting a crusade against slavery”

“The contest is really for empire on the side of the North, and for independence on that of the South, and in this respect we recognize an exact analogy  between the North and the Government of George III, and the South and the Thirteen Revolted Provinces. These opinions…are the general opinions of the English nation.”

Charles Dickens, famous English author, also wrote from London in 1861:

“The Northern onslaught upon slavery was no more than a piece of specious humbug designed to conceal it's desire for economic control of the Southern states.”

South Carolina and all six Southern Gulf States had already seceded when the Morrill Tariff passed the Senate. British analyst John Spence wrote in 1962:

“The cotton States had indeed seceded previously; but why? Because as we have seen, political power had passed into the hands of the North, and they anticipated from the change, an utter disregard of their interests, and a course of policy opposed to the spirit of the Constitution, and to their rights under it. Was it possible to offer to the world more prompt or convincing proof than this tariff affords, that their apprehensions were well founded.”

In fact, U.S. Senator Robert Toombs addressed the Georgia Legislature on November 13, 1860, on the urgency of the of the national tariff situation, pointing to the House Passage of the Morrill Tariff in May 1860. They were already considering a Georgia State Convention to secede from the United States. He described the Morrill Tariff as a coalition of materialistic Radical Republicans and radical abolitionists—using an analogy to the materialistic idolatry expressed as “Great is Diana of the Ephesians” in Acts 19;28.

Those who have been indoctrinated that the Civil War was a crusade against slavery,  may be surprised to learn that Lincoln’s chief economist, Henry C. Carey, wrote to House Speaker Schuyler Colfax in March 1865 that:

“To British Free-trade it is, as I have shown, that we stand indebted for the present Civil War.”

By late 1860,  Northern industrialists became nervous when they realized a tariff dependent North  would be competing with a free-trade South. They feared not only loss of tax revenue but also considerable loss of trade and shipping income. Some began to call for armed intervention, as did the Newark Daily Advertiser on April 2, 1861.

Mark Thornton and Robert B. Ekelund Jr, in their 2004 book on the economics of the Civil War summarized their general economic conclusions on tariffs.

Protective tariffs benefit some commercial and regional interests in the short to intermediate term, but they do more harm than good to the overall economy. Some interests are injured. Tariffs are essentially a redistribution of wealth through political means. Protected economic interests often become non-innovative drags on the economy and taxpayers. They generally raise the cost of living and doing business for non-protected consumers and businesses and are particularly hard on exporters.

Near the beginning of the Great Depression, the highest tariff bill in U.S. history. the Smoot-Hawley Tariff Act was passed on, June 17, 1930, in Congress and reluctantly signed by President Herbert Hoover. Its purpose was to protect suffering American workers, farmers, and business from foreign competition. Until then, exporters were faring well and remained one of the relative strengths of the economy. As could have been predicted by experience, exports soon suffered, dropping 61%. Unemployment was 7.8% when Smoot-Hawley passed and jumped to 16.3% in 1931 and peaked at 25.1% in 1933.

In 2006, economist Douglas Irwin did a mathematical regression analysis of the 1885 30% tariff on GDP. He found that protected industries were not able to increase their profits by 30% because the higher prices caused by the tariff also increased their costs. Their net profit was about 15%, which explains why they kept calling for still higher tariffs. Moreover, the tariff reduced exporter profits by about 11%. The total redistribution of income across commercial interests was a whopping 9% of total GDP. Most consumers were not directly involved in importing or exporting goods, so their economic loss was less visible.

This article is a condensation of my 12,000-word paper on the Morrill Tariff first published in 2012 and updated March 17, 2021. Footnotes are in the larger paper, which I will email on request.  

Protective tariffs have some legitimate use in sustaining U.S. independence in strategic materials and industry important the national security. However, using high tariffs as gun-boat diplomacy and gun-boat economics carries high risks to economic stability and national security. Using tariffs or any tax to redistribute earned income across households, regions, or industries has proven dangerous folly that should be checked by truth. clear-thinking fairness, courage, humble honesty, and courage.

“An honest man’s the noblest work of God.”--Alexander Pope (1688-1744)