Tariffs and Trusts — American School Protectionist David Hall Rice's Perspective: Part 1
Between the original producer and the ultimate consumer of the commodity there come in the middlemen, the dealers and speculators, with their charges, which are nothing more nor less than a direct tax upon the commodities which pass through their hands… So far as these middlemen, and storage and transportation agencies are absolutely necessary to economically convey commodities from the original producer to the ultimate consumer, their reasonable charges may be considered as a necessary tax upon these commodities… But when they unduly multiply themselves and their charges… then it becomes time to prune down these superfluous private taxations upon the necessities of mankind, and to reduce them within the limits that the actual necessities of both original producers and ultimate consumers require.1
Introduction
By the end of the 19th century, many large industrial monopolies, or trusts, grew up in the United States to economize production by centralization and elimination of competition. This development was highly controversial and met with criticism and skepticism from many quarters. Liberals and free traders blamed America’s high tariffs for the emergence of trusts. Protectionists fought back by enumerating the real economic forces at play, proving that the danger came from trusts enabled by the free trade system and foreign government-backed corporations, not the economizing of production via centralization as such.
The right course of action, protectionist David Hall Rice argued, was for the United States to continue its high tariff policy, as it eliminated many of the conditions conducive to trust formation; and, in the last resort, when trusts do inevitably appear, they would be domestic trusts that are within the government’s jurisdiction, i.e., within our power to regulate, instead of being shielded by the laws of a foreign government.
Much of the debate hinged upon identifying which shadowy forces were manipulating the government’s trade policy and to what ends.
Historical Background
By the end of the 1880s, strong protectionism had become the traditional trade policy of the United States. The Morrill Tariff, implemented by the Republican Party in 1861, with its high rates on manufactured goods, remained in force mostly unchanged until the early 20th century. During this period, American manufacturing grew to be the most productive and advanced in the world, providing high wages, a persistent positive trade balance, and a rising standard of living for Americans of all classes. But not everyone was happy with this situation, least of all foreign economic interests.
In his annual address to Congress of December 6, 1887, Democratic President Grover Cleveland, head of an administration notorious for its associations with the Cobden Club (a British NGO pushing free trade on an unwilling America), opened the first major salvo2 against protection since the free-trade Democrats self-immolated with their disastrous secession and rebellion of 1860. Cleveland pointed to the fact that the government was collecting so much revenue from the duties that it couldn’t spend it all. He rejected the idea of reducing internal taxes,3 a premonition of the current Washington consensus of low tariffs coupled with high income tax.
In his address, Cleveland insinuated that industrial lobbyists were to blame for the continued high tariff policy, while repeating the long discredited free trade dogma about tariffs being a tax on the consumer. Cleveland and the Democrats proposed to replace the protective tariff with a non-protective tariff for revenue only,4 the closest approximation to pure free trade possible in the real world. This speech re-opened the wound of party division in America, something which had been largely dormant since the end of Reconstruction in the 1870s.5 Thus came to an end our Second Era of Good Feelings.
Free traders in general began to levy the accusation that protection creates trusts, or business combinations, which dominate the economy and raise prices to steal from hard working Americans. They attacked then-Congressman William McKinley, known as the “apostle of protection,” and the protectionist Republican Party for bowing to the selfish interests of captains of industry like J.P. Morgan and Andrew Carnegie. Thanks to Cleveland’s divisive rhetoric the question of free trade versus protection was once again a political issue, paving the way for debates surrounding the free-trade Mills Bill of 1888 and the protective McKinley Bill of 1890.
This accusation was taken to task by the American protectionist political economist David Hall Rice in his 1890 book, Protective Philosophy, written to vindicate the McKinley Tariff against this foreign narrative taking hold of the minds of Americans. His skillful demonstration of the economic forces at play and the real-world political situation illustrated in stark terms the hypocrisy of the free traders, who wanted to tear down American trusts while leaving foreign trusts the full freedom to extract profits in our home market.
David Hall Rice on Trusts
Rice defined trusts as business combinations that raise prices without adding to the production process of a commodity. A simple way to think about it is that if you are the only person able to sell a product, you can charge as much as you like, since you don’t have to worry about someone else lowering their prices and stealing your customers; all you have to do is buy cheaply and sell expensively. And to attain this status of exclusive seller is the goal of the middleman. The necessary precondition of a trust arising, Rice tells us, is when a product passes through only a few hands during transport, or when its transportation to market is concentrated at a few entry or exit points. The latter circumstance enables the former, “since the concentration of the commodity into these few channels of transportation would appear to facilitate, if not to give its temporary control into the hands of the few.”6 Think of it as a funnel for trade, with the middleman damming up the small end and charging money for access. Moreover, when a nation is forced to import a product entirely from one or two countries, you have a foreign trust controlling prices to their advantage.7 When you have a few ports in your country receiving the product, even if it comes from many countries, you end up with a domestic importer trust taxing the whole country from those points of entry.8 And, as we will see, the free trade system creates these conditions amenable to trust formation. Once the channels of transport are concentrated, the trust can raise prices arbitrarily to make unearned profit at the nation’s expense, or what Rice calls commercial blackmail.9
In fact, Rice shows that, in direct contradiction to Cleveland’s conspiracy theory about trusts upholding protection, the only advocates of free trade who appeared to testify before Congress had been foreign importers and their selling customers:
It has been loudly heralded that a single car-load of these missionary gentlemen on the way between New York and Washington represented $60,000,000 of wealth. What did they go to Washington as advocates of the free-trade tariff system for? Why did they make the air of the capitol resound with their complaints about tariff taxes upon the commodities used by the people? Simply because their own middleman commission taxes, upon the commodities used by the people, were endangered. They were pleading for their system of personal middlemen's taxation which enriches their own pockets, because they know that protection operates to eliminate all such taxes as are unnecessary, while the free-trade tariff system encourages them.10
Examples of Trusts
In Rice’s day, commodities uniquely liable to trust formation included petroleum and sugar.11 Petroleum must pass through a pipeline to reach its destination, allowing it to easily fall into the possession of a few individuals. “Only a few pipe lines suffice to transport to market all the oil produced in our oil regions, and only a limited number of refineries are required to handle all of it. Here the trust steps in and assumes control, for the conditions exist which favor it. The fame of the Standard Oil Company is world-wide.”12 This calls to mind the power that OPEC nations wield today on the basis of their oil reserves.
Unrefined sugar, in the 1880s, was largely imported into the US through only a few of our ports, to be refined in a small number of large refineries. The trust arising out of the concentration of these refineries then “[dam] back the supply, until we consent to pay its extortionate price;” and the small number of exporters at the foreign ports of exit had unlimited power to raise prices, “provided only that the country exporting the commodity controls its production or means of transportation to market in the world economically, or so nearly controls it as to command the markets of the country consuming it.”13 Further examples of this type of export trust were “the Brazilian rubber trust, controlling crude India-rubber, and the foreign borax trust, controlled by the Rothschild's for many years.”14
The Solution
The solution to the sugar trust, Rice proposed, was to disperse the sugar refining by enabling American sugar planters to do it themselves. “No one would dream of organizing a sugar trust, to control its price to the ultimate consumer, in the country where it is produced on every plantation, any more than he would dream of forming a permanent grain trust in this country, where we raise grain on every farm.”15 To accomplish this would require tariffs on raw sugar imports to enable the American sugar planters to cover the initial costs of building the machinery. Then they could simply sell their sugar within the US without being as dependent upon shipping and the costs it incurs.
Rice’s proposed solution to the problem of trusts by means of increasing the number of factories falls in line with the American School’s idea of “placing the manufacturer by the side of the agriculturist.” Henry Charles Carey, the leading American School economist and advisor to the authors of the Morrill Tariff, said in 1853:
The artisan has always been the ally of the agriculturist in his contest with the trader and the government, as is shown in the whole history of the world. The first [the trader] desires to tax him [the agriculturalist] by buying cheaply and selling dearly. The second [the government] desires to tax him for permitting him to make his exchanges, and the more distant the place of exchange, the greater the power of taxation. The artisan comes near to him, and enables him to have the raw materials combined on the spot, the producer of them exchanging directly with the consumer, paying no tax for the maintenance of ship-owners, commission merchants, or shopkeepers.16
The Role of Technology in the Development of Trusts
Rice argued that the development of trusts in the 19th century was made both possible and inevitable by steam commerce. “Modern steam commerce on the ocean concentrates trade, by its economy, in a few great seaports of both the exporting and importing nation. To conduct it with the maximum economy requires larger and larger steamships, sailing from only a few ports, at which goods are assembled, to only a few ports from which they are distributed. This concentrates trade into a few narrow channels.”17 When combined with the hands-off free trade system, these shipping trusts gain tremendous leverage over global commerce.
For this reason, Rice advised the establishment of American steamship lines by means of subsidies, so that in the case of commodities that we cannot produce ourselves, we can at least “emancipate ourselves from foreign brokers' and shippers' trusts, by establishing diversified steamship lines of our own to different foreign sources of supply, or foreign countries of production. We can thus bring American competition into play, under the control of our own flag and laws, and be no longer subjected to the commercial supremacy of England, the hoary nursing mother of trusts against the rest of mankind.”18 Thankfully this wisdom was eventually heeded in the form of the Merchant Marine Act, or Jones Act, of 1920.
One lesson that can be drawn from Rice’s observation of the effects of steamships relates to both the dangers and advantages of improved transportation technology. In the wrong hands, these tools are very dangerous to the nation. Faster transport and communication made free trade more deadly in the 19th century. More so today have developments in transportation and communications technologies threatened the nation-state by enabling easy offshoring of essential industries by international middlemen. Hence the need for tariffs and capital control laws to disincentivize the alluring profits of global labor arbitrage that have empowered our rivals like China and eroded our industrial base to perilously low levels.
David Hall Rice, Protective philosophy. A discussion of the principles of the American protective system as embodied in the McKinley bill. (Boston: George B. Reed, 1890), p. 17-18.
Edward Stanwood, American Tariff Controversies in The Nineteenth Century, vol. II. (Cambridge: Houhgton, Mifflin, and Company; The Riverside Press), p. 227.
Stanwood, American Tariff Controversies vol II. p. 227.
Stanwood, American Tariff Controversies vol II. p. 199.
Stanwood, American Tariff Controversies vol II. p. 228-229.
Rice, Protective philosophy. p. 150.
Rice, Protective Philosophy. p. 152.
Rice, Protective Philosophy. p. 152.
Rice, Protective Philosophy. p. 159.
Rice, Protective Philosophy. p. 21.
Rice, Protective Philosophy. p. 150-151.
Rice, Protective Philosophy. p. 150.
Rice, Protective Philosophy. p. 151.
Rice, Protective Philosophy. p. 151
Rice, Protective Philosophy. p. 151.
Henry Charles Carey, The Slave Trade, Domestic and Foreign: Why it Exists, and how it May be Extinguished. (A. Hart, Late Carey & Hart, 1853), p. 87.
Rice, Protective Philosophy. p. 151.
Rice, Protective Philosophy. p. 159-160.
In fact, Rice shows that, in direct contradiction to Cleveland’s conspiracy theory about trusts upholding protection, the only advocates of free trade who appeared to testify before Congress had been foreign importers and their selling customers: - The same tactics appear time and time again by those who wish to subvert