Dividing Leviathan among the Merchants – Part 2
The Morrill Tariff, which was introduced by Republicans in the U.S. House of Representatives in 1858, was one of the three highest tariffs in U.S. History. It passed the House on May 10, 1860, receiving only one Southern vote. Lincoln campaigned for it and was elected President on November 6, 1860. It passed the Senate with no Southern votes on March 2, 1861, two days before Lincoln’s inauguration. This would more than double the tariff rates under the “Free-Trade” Tariff passed in 1857. Lincoln promised to collect the tariffs due at Southern ports, which were about 83 percent of the total U.S. tariff income. Its average tax on dutiable goods reached 47 percent, and the total overall average rate including duty-free items was 29 percent.
Besides paying about 83 percent of the import tariff, the Southern states accounted for about 80 percent of U.S. exports—cotton, tobacco, sugarcane, etc. Tariffs particularly hurt exporters because they raise domestic prices and costs of doing business and make American goods less competitive in foreign trade exchange, putting downward pressure on export prices and sales. The Confederate Government embraced free trade and planned a 15 percent tariff on most goods, including those previously duty free. This would have had a devastating effect on U.S. Federal tax revenues and Northern shipping income. The Confederate tariff was, however, unsuccessful because of Union Navy blockades.
Following Lincoln’s election, seven Southern states began democratic procedures to secede from the United States. South Carolina was first on December 20, 1860, followed by Mississippi, Florida, Alabama, Georgia, Louisiana, and Texas from January 9 to February 1, 1861. Following Lincoln’s call for 75,000 troops to prevent their secessions, Virginia, Arkansas, Tennessee, and North Carolina would have no part in this and seceded from April 17 to May 20, 1861. Federal troops blocked the secession of Maryland, Missouri, and Kentucky, but all three of these states furnished thousands of troops to the Confederacy.
Previous to the Morrill Tariff, the 1828 Tariff of Abominations reached dutiable rates of from 50 to 61 percent, but estimates of the percentage of dutiable goods varied from 70 to 90 percent according to various sources. Even the lowest estimate range is higher than the Morrill Tariff—with the overall tariff rate at 33 percent for the Tariff of Abominations and 29 percent for the Morrill Tariff. The 1828 Tariff of Abominations came very near provoking armed conflict between Federal troops and South Carolina militias and precipitated the Nullification Crisis in 1833. Somehow the lessons of the Tariff of Abominations were ignored in 1861.
High protective tariffs continued through the Reconstruction years and thereafter until 1913, with only modest easing under the two presidential terms of conservative Democrat Grover Cleveland, 1895-1889 and 1893-1897. The election of President Woodrow Wilson in November 1912 brought dramatic change. Following the Underwood Tariff Law passed on October 4, 1913, dutiable tariffs fell to an average of 27 percent during Wilson’s eight-year term. The most significant change, however, was that the percent of dutiable goods was reduced to 34 percent, reducing the overall average to only 9.1 percent. However, the ratification of the 16th Amendment in 1913 legalized Federal Income Tax, and the Underwood Tax Law imposed a very modest income tax. Most taxpayers paid only one percent, and the maximum rate was seven percent. Within a few years income tax rates progressed dramatically. The top bracket was 70 percent, before the Reagan era (1981-1988) tax cuts reduced it to 30 percent.
Thereafter, under the McCumber Tariff Law of September 1922, the dutiable rates began to rise and averaged 39 percent from 1923 to June 17, 1930. The overall average including duty-free goods, however, was only 14 percent, much lower than the generally high rates that had generally prevailed from 1824 to 1912.
On June17, 1930, near the beginning of the Great Depression, Congress passed one of the highest tariff bills in U.S. history, the Smoot-Hawley Act. Although an overwhelming majority of Republicans in Congress supported it, President Herbert Hoover signed it reluctantly. Its stated purpose was to protect suffering American workers, farmers, and businesses from foreign competition. Until then, exporters were faring well and remained a relative strength in the economy. The House passed the bill 264 to 147, with 244 Republicans and 20 Democrats voting for it. The Senate passed it 44 to 42, with 39 Republicans and 5 Democrats voting for it. As could have been predicted by historical experience, exports soon suffered, dropping 61 percent, and even Canada introduced a retaliatory tariff against U.S. goods. Unemployment was at 7.8 percent when Smoot-Hawley passed and jumped to 16.3 percent in 1931. In addition, on June 6, 1932, Hoover signed the Revenue Act of 1932 with bipartisan backing. It raised corporate and top individual income tax rates dramatically to make up for falling tax revenues and to balance the budget. Unemployment peaked at 25.1 percent in 1933. Protectionist tariffs are often harmful to economic growth and are essentially a political means of redistributing regional and commercial wealth. Raising individual and corporate income taxes undercuts wealth creation and is inadvisable in a declining economy.
The average dutiable rate under Smoot-Hawley reached its peak in 1932 at 59.1 percent, but because the percent of duty-free goods was still near where they had been placed under President Wilson, the overall average was only about 20 percent. Although this was a 43 percent increase from the average from 1923 to the first half of 1930, it was not actually the worst tariff in U.S. history. Having sorted through the figures and estimates, I would rank the 1828 Tariff of Abominations as the worst, the Morrill Tariff of 1861 as second, and Smoot-Hawley third, although very destructive. The Smoot-Hawley Act did not cause the Great Depression, but it surely helped make it much worse than it could have been. Each of the three highest tariffs in U.S. history is associated with significant political, social, and economic turmoil.
In most of U.S. history, the Republicans were the party of high protective tariffs, and the Democrats were the party of low tariffs and free trade. The Republican Party was an economic protectionist party from its establishment and absorption of the protectionist Whig Party from 1854 to 1858 through the Hoover Administration, although Hoover himself had begun to lean away from it. Lincoln had been a fervent Whig and admirer of Whig leader Henry Clay, whose “American Economic System” included high protective tariffs for manufacturing.
In the 1932 Elections, following the beginning years of the Great Depression and the Smoot-Hawley Tariff, Democrat Franklin D. Roosevelt beat Republican Herbert Hoover 57 percent to just under 40 percent, carrying 472 Electoral votes and 42 states against Hoover’s 59 Electoral votes and 6 states. South Carolina, Georgia, Mississippi, and Louisiana voted over 90 percent Democrat. Other Southern states voted Democrat from 59 percent in Kentucky to 88 percent in Texas. . North Carolina voted 70 percent Democrat. The Republicans held a 218 to 216 majority before the election. The Democrats led 313 to 117 after the election, gaining 92 seats. The Democrats gained 12 seats in the Senate, turning a 48 to 47 Republican majority to a 59 to 36 Democrat majority. On June12, 1934, congress passed the Reciprocal Tariff Act, which transferred the authority to set and negotiate tariffs to the Executive branch. This allowed Roosevelt to liberalize U.S. trade policy and marked a sharp departure from the previous eras of protectionist dominance.
The end of World War II marked the beginning of a sharp decline in tariff rates. By that time many Republicans were beginning to favor free trade and low tariffs. The dutiable tariff on imports dropped from 47 percent in 1934 to 13 percent in 1952. They continued to drop under the Republican Administration of Dwight Eisenhower from 1953 to 1960.
It is a serious historical mistake to think that the Republican Party of 1860 bears a close resemblance to Ronald Reagan or Donald Trump. It is an even bigger mistake not to recognize the enormous transformation of the conservative Constitutionalist Democrat Party of Thomas Jefferson, Jeff Davis, and Grover Cleveland to the radical leftist Democrat Party of 2019.
The dutiable tariff dropped to just 4.9 percent in the first year of President Reagan’s eight-year term. Reagan was a strong free trade advocate. The overall average tariff including duty-free items was only 3.4 percent in 1988, a far cry from the days of protectionist dominance.
Free Trade and low tariffs had become the American way. In the last year of the Obama Administration, the dutiable tariff rate was only 5.0 percent and the overall average only 1.5 percent.
There were, however, problems brewing beneath the surface. Free Trade was not necessarily Fair Trade, and this caused a steady loss of millions of American jobs to overseas manufacturers.
Furthermore, the U.S. was becoming too dependent on foreign nations for materials and technology products critical to U.S. national security. This is why President Trump has placed a 25 percent tariff on steel and a 10 percent tariff on aluminum on most countries. He has also placed a 25 percent tariff on 818 categories of goods from the People’s Republic of China (PRP) valued at $50 billion. In 2018, the U.S. had a $223 billion trade deficit with China. China is a totalitarian dictatorship and is the very epitome of manipulative unfair trade and disregard for patent laws. Many U.S. corporations benefit from Chinese cheap labor, but it hurts most American workers and businesses. The U.S. total trade deficit in 2017 was $566 billion. Trade deficits hurt American jobs, currency value, and interest rates, and have long range impacts on national security and sovereignty.