by Paul R. Spitzzeri
Failing an 11th-hour deal, a 25% tariff on targeted goods from Canada and México and a 10% one on Chinese products is scheduled to implemented tomorrow, though no details have yet been offered about which items are to be effected and which exempted, while there are purported plans for further tariffs sometime later this month and a report on the broad issue of the punitive tax is due around the first of April.
While many may not know the specifics of how tariffs work, it has been broadly assumed that the imposts are on the countries named, while the reality is that American firms who import the goods actually pay the assessment. Moreover, it is usually the case that these companies will then pass the costs on to the consumer.
The administration in Washington isn’t just gambling on the fact that the imposition of these steep tariffs will spur domestic production of those goods that are imported, but that it will force the three nations to negotiate on the issues of immigration and drug smuggling. The president has claimed that any negative consequences to American consumers would be short-lived and that they would support tariffs, while allies in the business world believe that any increases in inflation are worth the benefits to national security related to those drug and immigration matters.
For historical perspective on tariffs, it is interesting and instructive to review commentaries from such organizations as the libertarian-leaning Cato Institute and its review on the subject in the period from 1787 to 1934 and the examination of the broad concept of the tariff with data from the past by the independent, non-partisan Council on Foreign Relations, which has existed since 1921.
Additionally, the president and some of his advisers have publicly looked to the 1890s as an era to emulate because of the aggressive use of tariffs and the lack of an income tax. In fact, Department of Commerce nominee Howard Lutnick, who is particularly bullish on tariffs, believes that they can replace the federal income tax, while Secretary of the Treasury Scott Bessent has touted an “optimal tariff” and Stephen Miran advocates that this be 20%, citing the work of a pair of economists, who, however, call it a “very bad idea.”
The Gilded Age glorification extends to the proposed return of the name of Alaska’s Mount Denali to Mount McKinley because, before he became president, William McKinley sponsored an 1890 tariff act that is cited by the current administration as something to emulate, even though the so-called “Gay Nineties” included a terrible depression that burst forth in 1893, massive labor strikes and violence, and a concentration of wealth that was accompanied by horrible poverty and want. Small wonder that many feel we are in a new Gilded Age, while others note the demonstrative shifts from free trade advocacy to hawkishness on tariffs.
Speaking of the 1890s, the featured object from the Museum’s collection for this post is the November 1892 issue of The Californian Illustrated Magazine and, specifically, an article on “Our Commercial Growth and the Tariff” by Richard H. McDonald, Jr. (1854-1913), a Harvard and Yale graduate and an officer with his father and brother of the Pacific Bank and People’s Home Savings Bank in San Francisco and who was financially allied with Moses H. Sherman, who became a major transportation and street railroad figure in Los Angeles.
McDonald’s father, Richard, Sr. (1820-1903) was a Gold Rush ’49er and then a New York City physician whose tombstone proclaimed his total abstinence from the dual destroyers of alcohol and tobacco, though it mentioned nothing of his banking career, while his mother Sarah Whipple was a descendant of a signer of the Declaration of Independence. The junior McDonald subtitled his essay “From a Republican Standpoint,” though the presidential election saw the defeat of G.O.P. incumbent Benjamin Harrison by Democrat Grover Cleveland.
The article began with the assertion that “the United States is the greatest producing nation in the world” particularly with food and of natural resources used in manufacturing, while it also averred that “Americans consume more per capita than any other people, yet we produce surpluses of nearly all the necessaries of life and of many luxuries.” American products were “of wild range and abundant” thanks to “favorable climatic conditions, exceeding fertility of soil, and the energy and intelligence of the people.”
Notably, McDonald continued,
There is very little exported from this country that is not wholly produced here . . . but our foreign trade is far less than it ought to be, or would be, if proper efforts were made to develop it. To find markets for their surplus products is of the highest importance to any people, and especially to us, since we have passed the colonizing period, and have gained a position in which we are able to produce almost without limit. Our industries have already reached immense proportion, and are destined to the greatest development in the future, if proper efforts are made . . . A nation which imports more for consumption than it exports cannot prosper any more than the individual who consumes more than he produces.
The author added that in the colonial period “there were statesmen who forecast the future and urged policies that would avoid depletion [of financial resources] through adverse balances of trade” as American industrialization slowly developed through much of the 19th century. Though there was a tariff act, the first passed by Congress after the ratification of the Constitution in 1789, McDonald remarked that “the policy pursued from Washington to Polk was measurably successful in preventing diminution of our money resources.”
He went on, however, that “in 1846, a new policy was inaugurated which checked industrial growth,” with the Walker Tariff cutting imposts after Democrat James Polk defeated Whig Henry Clay, a strong advocate for high tariffs, in the 1844 presidential election. It should be added that the Whigs collapsed after the 1852 campaign and the Republican Party rose from its ashes four years later. McDonald stated that for thirty years “balances of trade were uniformly against us, and the country would have been greatly distressed for money, had it not been for the phenomenal production of gold in California.”
In the depths of the Civil War, the piece observed, the previous tariff policy “was restored” through what was called the Revenue Act, with the Office of Internal Revenue established to collect tariffs on alcoholic beverages and tobacco (those twin evils abhorred by McDonald’s father) with money badly needed by the Union as it fought to suppress the Confederate rebellion. The writer, though, commented that “time was required to put our industries on a footing that would enable them to produce sufficient to supply domestic demands.”
Once the Civil War concluded, “the energies of the people were devoted to colonizing and developing new regions” in the western states and territories, “to building railroads, and making other internal improvements.” It was fully a decade until the country was “in a condition to overcome adverse balances, and turn the tide in our favor” and McDonald claimed that “had the principle of the tariff of 1846 been restored at the close of the war, and continuously adhered to, there would not now be large and diversified manufacturing industries in this country.”
Even with an astounding agricultural ascendancy, the argument advanced was that “the protective principle, having been preserved, our industries have thrived.” At the end of the 1876-1877 fiscal year, “a handsome balance appeared in our favor, and the tide has flowed our way ever since,” not just with the favorable balance and increase in the hoard of gold in the treasury, but the paying off of some foreign-held securities, while others were bought and brought to America “so that the interest on them is paid here, instead of the holders on the other side of the Atlantic,” principally in London.
The classic age of the “gold standard” arrived by the 1880s and McDonald noted that the American policy “to make treasury and national bank notes circulable everywhere at par with gold” made economic circumstances difficult for other nations and the Bank of England forced to borrow $70 million from the United States “and for which a premium was paid.” Because of the restriction in the flow of gold, the author continued, “silver’s hope rests upon the maintenance of the protective principle in tariff legislation” and this “contributes materially to an increase of our domestic circulating medium, which is so much needed, and by a kind of money which all nations regard as the best.”
The author observed that from 1875 to 1890, imports to the tune of up to $400 million were “consisting chiefly of manufactures which we should have produced for ourselves, while some 75% of exports were from agricultural production, but there was an imbalance, so,
It is therefore wise that we should develop those industries in which we are deficient, to supply home wants to the utmost practicable extent. This will lessen importation and consequently enlarge balances of trade in our favor. The time has come when this policy also should be pursued with a view to larger exportation of manufactures. We have relied too much on exporting products of agriculture. Indeed, our people have not displayed their wonted energy on building up export trade.
After going into some detail concerning agricultural production issues, especially concerning trade with Great Britain, with McDonald writing that this 19th century dominant power didn’t import American food products for itself, but, rather, “largely to supply countries to which we should export directly” because of its dominance in ocean transport and shipping. It was American cotton that European nations most needed, so the writer claimed “what a vast field for employment would be opened to our people, and what immense wealth could come to our country, if all our cotton were manufactured at home and then sold abroad!” It didn’t seem to occur to him whether there would be much interest in Americans doing that back-breaking work, however.
Remarking that “the best trade is that between nations whose productions are different,” McDonald commented that adverse balances to trade existed with France because of the importation of silk and wine, with Germany due to sugar and with Italy because of fruit, but “all of which we are able to produce for ourselves.” He added that “if our industries, manufacturing and agricultural, were properly diversified and enlarged, there would be little that we should need of European produce” and offered the example of California being able to “produce in sufficient quantities to supply the whole country” in citrus, figs, olives and preserved fruit and nuts that were imported to the tune of $15 million.
Returning to Britain, the writer repeated that, while trade was in favor of the United States at around $250 million, some $60 million in gold was sent to that nation “to square our trade accounts with other countries” only “because trade balances of the world are paid in London.” With other countries, however, America was deficient in exports, including Brazil, China, Cuba, Hawaii, Japan and México, so that, beyond Europe the imbalance was some $200 million, though in 1892, exports rose by $145 million. Still, most of the trade were “almost wholly of an exchange of commodities,” so that direct trade would erase “all danger of adverse balances” and increased manufacturing was vital “in order to be able to better supply those countries.”
Given America’s agricultural abundance, McDonald advocated for these products to be sold internally, especially because he observed that workers were better paid “and can afford to live better” here. Therefore, a policy was needed that “will increase the number of consumers at home and transfer the surplus labor of the field to the shop and mill.” If this was done, “the day is not distant when the country will not be over-burdened with agricultural products.” Surpluses of produce, with 75% of all exports in this area and half the value in cotton, were such that “the McKinley law was framed and adopted by the Republican party so as to give better protection to agriculture than any previous tariff measure.”
With respect to the 1890 tariff act, the author noted that “high duties are put upon luxuries, because they are mainly consumed by those who are able to bear the expense,” which is another way of stating that consumers bear the passed-on costs of tariffs.” For goods that could be domestically produced, “the duties are just high enough to make up the difference in the cost of production in this and foreign countries,” with the main variation due to wages. For McDonald, “such duties simply equalize conditions and render monopoly in production impossible either at home or abroad,” but he continued,
The only departure from this principle is in imposing higher duties to protect new and infantile industries until they are able to compete with foreign producers.
Yet, the purported benefits of tariffs to California were almost exclusively in the agricultural sector and McDonald insisted that the McKinley tariff was such that “the spirit of he law is to assure compensatory wages to the laborer, and to capital reasonable remuneration.” Crucial, too, was the movement to improve American shipping to cut into Britain’s sheer dominance in that realm of international transportation, along with an impetus to commercial and industrial expansion, as some $100 million was expended to foreign transport companies.
He advocated for an aggressive shipbuilding program as America had the labor and materials to churn out the highest level of quality for craft. Significantly, it was added that “one of the conditions is, that the Government may take the ships for naval uses, in case of war.” Generally, the writer commented that “if the law is permitted to stand, and is faithfully executed, it will tend strongly to the creation of a merchant marine worthy [of] a nation of our greatness and power.”
McDonald ended his essay with the view that,
The policy thus inaugurated, if adhered to, will give larger employment to our people, strengthen our finances, assure an honorable and influential position in the world’s commerce, a power in diplomacy, and a position in the politics of nations, to which we are entitled from our unequaled wealth, from the intelligence of the people and the freedom of our institutions.
As noted above, a massive depression erupted in 1893, just a few months after this article, and a major contributor to the panic in San Francisco was the failure of the banks that the McDonalds controlled. Both Richard, Sr. and Jr. were criminally charged (another son, Frank, fled the country), but (shockingly!) escaped punishment. The younger McDonald reemerged as an attorney, but left a small estate of several thousand dollars when he died in 1913.
There was, following McDonald’s essay, a counterpoint “From a Democratic Standpoint” offered on “Our Commercial Growth and the Tariff” by Stephen M. White, a native of the northern part of the Golden State, but who became a successful attorney in Los Angeles and was just elected as a United States senator. We’ll return soon with a look at his view and that of the Democrats of tariffs, so be sure to check back for that.
As highlighted in this post, we are in an era reminiscent of the Gilded Age, and we should be cautious about whether we will face a similar outcome. Currently, raising tariffs appears to be the primary tool used to counter foreign competitive advantages and protect domestic industries. However, I believe that truly enhancing our productivity and competitiveness is far more important. Otherwise, we risk merely building a wall around ourselves, fostering complacency rather than genuine progress.