TERRE HAUTE — Misguided economic thinking can have very serious, even fatal, results.
A few weeks ago I wrote that the U.S. war in the Philippines, which cost around 200,000 Filipino lives around the turn of the last century, was at least partly the result of mistaken economic thinking.
In that case, American businessmen and politicians believed that only a strong U.S. military presence overseas and government-negotiated, protectionist trade deals with foreign countries could ensure prosperity.
Remarkably, another, much more prominent American war was also at least partly the result of such “mercantilist” ideas about trade — the U.S. Civil War. (Mercantilism means, in part, government policies favoring exports while protecting domestic industry from foreign competition).
For several decades prior to the Civil War, northerners and southerners fought about international trade. Southern states, as a whole, favored freer trade while northerners, especially members of Henry Clay’s Whig Party and then Lincoln’s Republicans, favored higher protective tariffs. Indeed, high tariffs were an essential part of Clay’s so-called “American System.”
Clay and Lincoln favored higher taxes on imports in order to protect northern manufacturers and to provide revenue so that the federal government could hand out money for “internal improvements,” mostly subsidies for politically well-connected railroads.
As Loyola College of Maryland economist Thomas DiLorenzo put it, Clay’s “American System … was the framework for a giant political patronage system. … [It] was … the worst sort of special-interest, pork-barrel politics.”
Clay had worked for decades on behalf of his “American System.” In 1824, as speaker of the House of Representatives, Clay proposed a sharp tariff increase and in 1828 was the chief sponsor of the so-called “Tariff of Abominations,” a 50-percent tax on imports that South Carolina refused to collect, leading to a constitutional crisis. In the end, the federal government compromised, reduced the tariff and the crisis passed.
According to DiLorenzo, Clay was infuriated about having to lower the tariff and, in a speech on the floor of the House of Representatives, vowed to someday “defy the South, the president and the devil” if necessary to raise the tariff again.
Lincoln, who would deliver Clay’s eulogy and called himself a “Clay tariff man,” was also an ardent believer in protective tariffs. As Lincoln once famously stated, “I don’t know much about the tariff, but I do know that if I buy a coat in America, I have a coat and America has the money. If I buy a coat in England, I have the coat and England has the money.”
Economist Todd Buchholz summed up Lincoln’s folksy statement: “[Lincoln] was right — he did not know much about the tariff.”
Trade, whether between individuals in different states or in different countries, is simply a way for people to obtain goods and services more cheaply than they could if they had to produce those goods and services themselves. Trading for goods allows people to specialize in producing what they produce best, creating more overall wealth. Barriers to trade, while temporarily beneficial to specific producers, have enormous costs for consumers as a whole.
Unfortunately, Lincoln was not alone in his protectionist beliefs and Congress eventually passed the famous Morrill Tariff just before Lincoln’s first inauguration. The Morrill Tariff increased the average tariff to 32 percent and then 47 percent from 15 percent in two years.
While consumers north and south suffered from the tariff, the south, which was more dependent on foreign trade, suffered more. When the Morrill Tariff passed with 105 votes in the House of Representatives, it did so with only one yes vote from a southern state — Tennessee. All the other votes in favor of the tariff came from representatives of states outside the south.
The federal government’s dependence on tariffs for revenue lead to a very uneven tax burden between the north and south. Even prior to passage of the Morrill Tariff, southerners were paying more than half of the federal tax burden despite having less than half the population of the north.
When the south began to talk of leaving the union, northern manufacturers and northern port cities, such as New York, Boston and Baltimore, understood the threat they faced. Low tariffs in Charleston, New Orleans and Savannah would mean those cities suddenly would become North America’s major trading posts, leaving the northern ports out in the cold.
Before the war began, the Newark Daily Advertiser, a northern newspaper, lamented that southerners favored free trade. The paper warned that, if the south left the union, this “must operate to the serious disadvantage of the North” as “commerce will be largely diverted to Southern cities.” The paper, DiLorenzo notes, went on to advocate using military force to close all southern ports.
When southern states started leaving the union, the southern constitution was indeed the Republicans’ and northern manufacturers’ worst nightmare. The south’s constitution banned taxes on imports for the promotion of any branch of industry. In other words, the south constitutionally prohibited trade protectionism.
When Lincoln took his oath of office, he repeated his often-stated vow not to disturb the institution of slavery in the south. But he made it clear that on the matter of the tariff, he would invade the south if it did not cooperate. In Lincoln’s words:
“The power confided in me will be used to hold, occupy, and possess the property, and places belonging to the government, and to collect the duties and imposts; but beyond what may be necessary for these objects, there will be no invasion, no using of force against, or among the people anywhere.”
In other words, there will be an invasion if the south does not collect the tariff.
It is often said that the Civil War was about slavery. But, as Emory University professor Donald W. Livingston has said, ending slavery was more of an alibi for the war after the fact. A perhaps larger impetus for America’s Civil War, a war that cost more than 600,000 lives, was a desire to protect northern business interests from foreign trade and to provide revenue for federal subsidies to favored northern businesses. In other words, special interest politics and misguided economic beliefs helped ignite the fuse of America’s costliest war.
Arthur Foulkes is a Terre Haute native and long-time resident. The Tribune-Star reporter writes a weekly column on business and economics. He can be reached at (812) 231-4232.
TERRE HAUTE — Misguided economic thinking can have very serious, even fatal, results.
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