What we have said of duties on importati_Principles of Political Economy Abridged with Critical, Bibliographical, and Explanatory Notes, and a Sketch of the History of Political Economy

to discriminating duties which favor importation from one place, or in one

particular manner, in contradistinction to others; such as the preference

given to the produce of a colony, or of a country with which there is a

commercial treaty; or the higher duties formerly imposed by our navigation

laws on goods imported in other than British shipping. Whatever else may

be alleged in favor of such distinctions, whenever they are not nugatory,

they are economically wasteful. They induce a resort to a more costly mode

of obtaining a commodity in lieu of one less costly, and thus cause a

portion of the labor which the country employs in providing itself with

foreign commodities to be sacrificed without return.

§ 6. Effects produced on international Exchange by Duties on Exports and

on Imports.

There is one more point, relating to the operation of taxes on commodities

conveyed from one country to another, which requires notice: the

influences which they exert on international exchanges. Every tax on a

commodity tends to raise its price, and consequently to lessen the demand

for it in the market in which it is sold. All taxes on international trade

tend, therefore, to produce a disturbance, and a readjustment of what we

have termed the equation of international demand.

Taxes on foreign trade are of two kinds—taxes on imports and on exports.

On the first aspect of the matter it would seem that both these taxes are

paid by the consumers of the commodity; that taxes on exports consequently

fall entirely on foreigners, taxes on imports wholly on the home consumer.

The true state of the case, however, is much more complicated.

“By taxing exports we may, in certain circumstances, produce a division of

the advantage of the trade more favorable to ourselves. In some cases we

may draw into our coffers, at the expense of foreigners, not only the

whole tax, but more than the tax; in other cases we should gain exactly

the tax; in others, less than the tax. In this last case a part of the tax

is borne by ourselves; possibly the whole, possibly even, as we shall

show, more than the whole.”

Reverting to the supposititious case employed of a trade between England

and the United States in iron and corn, suppose that the United States

taxes her export of corn, the tax not being supposed high enough to induce

England to produce corn for herself. The price at which corn can be sold

in England is augmented by the tax. This will probably diminish the

quantity consumed. It may diminish it so much that, even at the increased

price, there will not be required so great a money value as before. Or it

may not diminish it at all, or so little that, in consequence of the

higher price, a greater money value will be purchased than before. In this

last case, the United States will gain, at the expense of England, not

only the whole amount of the duty, but more; for, the money value of her

exports to England being increased, while her imports remain the same,

money will flow into the United States from England. The price of corn

will rise in the United States, and consequently in England; but the price

of iron will fall in England, and consequently in the United States. We

shall export less corn and import more iron, till the equilibrium is

restored. It thus appears (what is at first sight somewhat remarkable)

that, by taxing her exports, the United States would, in some conceivable

circumstances, not only gain from her foreign customers the whole amount

of the tax, but would also get her imports cheaper. She would get them

cheaper in two ways, for she would obtain them for less money, and would

have more money to purchase them with. England, on the other hand, would

suffer doubly: she would have to pay for her corn a price increased not

only by the duty, but by the influx of money into the United States, while

the same change in the distribution of the circulating medium would leave

her less money to purchase it with.(344)

This, however, is only one of three possible cases. If, after the

imposition of the duty, England requires so diminished a quantity of corn

that its total value is exactly the same as before, the balance of trade

would be undisturbed; the United States will gain the duty, England will

lose it, and nothing more. If, again, the imposition of the duty occasions

such a falling off in the demand that England requires a less pecuniary

value than before, our exports will no longer pay for our imports; money

must pass from the United States into England; and England’s share of the

advantage of the trade will be increased. By the change in the

distribution of money, corn will fall in the United States, and therefore

it will, of course, fall in England. Thus England will not pay the whole

of the tax. From the same cause, iron will rise in England, and

consequently in the United States. When this alteration of prices has so

adjusted the demand that the corn and the iron again pay for one another,

the result is that England has paid only a part of the tax, and the

remainder of what has been received into our treasury has come indirectly

out of the pockets of our own consumers of iron, who pay a higher price

for that imported commodity in consequence of the tax on our exports,

while at the same time they, in consequence of the efflux of money and the

fall of prices, have smaller money incomes wherewith to pay for the iron

at that advanced price.

It is not an impossible supposition that by taxing our exports we might

not only gain nothing from the foreigner, the tax being paid out of our

own pockets, but might even compel our own people to pay a second tax to

the foreigner. Suppose, as before, that the demand of England for corn

falls off so much on the imposition of the duty that she requires a

smaller money value than before, but that the case is so different with

iron in the United States that when the price rises the demand either does

not fall off at all, or so little that the money value required is greater

than before. The first effect of laying on the duty is, as before, that

the corn exported will no longer pay for the iron imported.

Money will therefore flow out of the United States into England. One

effect is to raise the price of iron in England, and consequently in the

United States. But this, by the supposition, instead of stopping the

efflux of money, only makes it greater; because, the higher the price, the

greater the money value of the iron consumed. The balance, therefore, can

only be restored by the other effect, which is going on at the same time,

namely, the fall of corn in the American and consequently in the English

market. Even when corn has fallen so low that its price with the duty is

only equal to what its price without the duty was at first, it is not a

necessary consequence that the fall will stop; for the same amount of

exportation as before will not now suffice to pay the increased money

value of the imports; and although the English consumers have now not only

corn at the old price, but likewise increased money incomes, it is not

certain that they will be inclined to employ the increase of their incomes

in increasing their purchases of corn. The price of corn, therefore, must

perhaps fall, to restore the equilibrium, more than the whole amount of

the duty; England may be enabled to import corn at a lower price when it

is taxed than when it was untaxed; and this gain she will acquire at the

expense of the American consumers of iron, who, in addition, will be the

real payers of the whole of what is received at their own custom-house

under the name of duties on the export of corn.

In general, however, there could be little doubt that a country which

imposed such taxes would succeed in making foreign countries contribute

something to its revenue; but, unless the taxed article be one for which

their demand is extremely urgent, they will seldom pay the whole of the

amount which the tax brings in.(345)

The result of this investigation may, then, be generally

formulated as follows: That country which has the strongest demand

for the commodities of other countries as compared with the demand

of other countries for its own commodities will pay the burden of

the export duty.

Thus far of duties on exports. We now proceed to the more ordinary case of

duties on imports: “We have had an example of a tax on exports, that is,

on foreigners, falling in part on ourselves. We shall therefore not be

surprised if we find a tax on imports, that is, on ourselves, partly

falling upon foreigners.

“Instead of taxing the corn which we export, suppose that we tax the iron

which we import. The duty which we are now supposing must not be what is

termed a protecting duty, that is, a duty sufficiently high to induce us

to produce the article at home. If it had this effect, it would destroy

entirely the trade both in corn and in iron, and both countries would lose

the whole of the advantage which they previously gained by exchanging

those commodities with one another. We suppose a duty which might diminish

the consumption of the article, but which would not prevent us from

continuing to import, as before, whatever iron we did consume.

“The equilibrium of trade would be disturbed if the imposition of the tax

diminished, in the slightest degree, the quantity of iron consumed. For,

as the tax is levied at our own custom-house, the English exporter only

receives the same price as formerly, though the American consumer pays a

higher one. If, therefore, there be any diminution of the quantity bought,

although a larger sum of money may be actually laid out in the article, a

smaller one will be due from the United States to England: this sum will

no longer be an equivalent for the sum due from England to the United

States for corn, the balance therefore must be paid in money. Prices will

fall in England and rise in the United States; iron will fall in the

English market; corn will rise in the American. The English will pay a

higher price for corn, and will have smaller money incomes to buy it with;

while the Americans will obtain iron cheaper, that is, its price will

exceed what it previously was by less than the amount of the duty, while

their means of purchasing it will be increased by the increase of their

money incomes.

“If the imposition of the tax does not diminish the demand, it will leave

the trade exactly as it was before. We shall import as much, and export as

much; the whole of the tax will be paid out of our own pockets.

“But the imposition of a tax on a commodity almost always diminishes the

demand more or less; and it can never, or scarcely ever, increase the

demand. It may, therefore, be laid down as a principle that a tax on

imported commodities, when it really operates as a tax, and not as a

prohibition either total or partial, almost always falls in part upon the

foreigners who consume our goods; and that this is a mode in which a

nation may appropriate to itself, at the expense of foreigners, a larger

share than would otherwise belong to it of the increase in the general

productiveness of the labor and capital of the world, which results from

the interchange of commodities among nations.”

Those are, therefore, in the right who maintain that taxes on imports are

partly paid by foreigners; but they are mistaken when they say that it is

by the foreign producer. It is not on the person from whom we buy, but on

all those who buy from us, that a portion of our custom duties

spontaneously falls. It is the foreign consumer of our exported

commodities who is obliged to pay a higher price for them because we

maintain revenue duties on foreign goods.

There are but two cases in which duties on commodities can in any degree,

or in any manner, fall on the producer. One is, when the article is a

strict monopoly, and at a scarcity price. The price in this case being

only limited by the desires of the buyer—the sum obtained for the

restricted supply being the utmost which the buyers would consent to give

rather than go without it—if the treasury intercepts a part of this, the

price can not be further raised to compensate for the tax, and it must be

paid from the monopoly profits. A tax on rare and high-priced wines will

fall wholly on the growers, or rather, on the owners of the vineyards. The

second case, in which the producer sometimes bears a portion of the tax,

is more important: the case of duties on the produce of land or of mines.

These might be so high as to diminish materially the demand for the

produce, and compel the abandonment of some of the inferior qualities of

land or mines. Supposing this to be the effect, the consumers, both in the

country itself and in those which dealt with it, would obtain the produce

at smaller cost; and a part only, instead of the whole, of the duty would

fall on the purchaser, who would be indemnified chiefly at the expense of

the land-owners or mine-owners in the producing country.

Duties on importation may, then, be divided “into two classes: (1) those

which have the effect of encouraging some particular branch of domestic

industry [protective duties], (2) and those which have not [revenue

duties]. The former are purely mischievous, both to the country imposing

them and to those with whom it trades. They prevent a saving of labor and

capital, which, if permitted to be made, would be divided in some

proportion or other between the importing country and the countries which

buy what that country does or might export.

“The other class of duties are those which do not encourage one mode of

procuring an article at the expense of another, but allow interchange to

take place just as if the duty did not exist, and to produce the saving of

labor which constitutes the motive to international as to all other

commerce. Of this kind are duties on the importation of any commodity

which could not by any possibility be produced at home, and duties not

sufficiently high to counterbalance the difference of expense between the

production of the article at home and its importation. Of the money which

is brought into the treasury of any country by taxes of this last

description, a part only is paid by the people of that country; the

remainder by the foreign consumers of their goods.

“Nevertheless, this latter kind of taxes are in principle as ineligible as

the former, though not precisely on the same ground. A protecting duty can

never be a cause of gain, but always and necessarily of loss, to the

country imposing it, just so far as it is efficacious to its end. A

non-protecting duty, on the contrary, would in most cases be a source of

gain to the country imposing it, in so far as throwing part of the weight

of its taxes upon other people is a gain; but it would be a means which it

could seldom be advisable to adopt, being so easily counteracted by a

precisely similar proceeding on the other side.

“If the United States, in the case already supposed, sought to obtain for

herself more than her natural share of the advantage of the trade with

England, by imposing a duty upon iron, England would only have to impose a

duty upon corn sufficient to diminish the demand for that article about as

much as the demand for iron had been diminished in the United States by

the tax. Things would then be as before, and each country would pay its

own tax—unless, indeed, the sum of the two duties exceeded the entire

advantage of the trade, for in that case the trade and its advantage would

cease entirely.

“There would be no advantage, therefore, in imposing duties of this kind

with a view to gain by them in the manner which has been pointed out. But,

when any part of the revenue is derived from taxes on commodities, these

may often be as little objectionable as the rest. It is evident, too, that

considerations of reciprocity, which are quite unessential when the matter

in debate is a protecting duty, are of material importance when the repeal

of duties of this other description is discussed. A country can not be

expected to renounce the power of taxing foreigners unless foreigners will

in return practice toward itself the same forbearance. The only mode in

which a country can save itself from being a loser by the revenue duties

imposed by other countries on its commodities is, to impose corresponding

revenue duties on theirs. Only it must take care that those duties be not

so high as to exceed all that remains of the advantage of the trade, and

put an end to importation altogether, causing the article to be either

produced at home, or imported from another and a dearer market.”

By “reciprocity” is meant that, when one country admits goods free

of duty from a second country, this latter country will also admit

the commodities of the former free of duty; or, as is often the

case, if not free of duty, at a less than the usual rate. Until

the last few years we have had a reciprocity treaty with Canada,

but it is not now in force; and an arrangement for closer

commercial relations with Mexico is now under consideration.

Chapter IV. Comparison Between Direct And Indirect Taxation.

§ 1. Arguments for and against direct Taxation.

Are direct or indirect taxes the most eligible? A man dislikes not so much

the payment as the act of paying. He dislikes seeing the face of the

tax-collector, and being subjected to his peremptory demand. Perhaps, too,

the money which he is required to pay directly out of his pocket is the

only taxation which he is quite sure that he pays at all. That a tax of

two shillings per pound on tea, or of three shillings per bottle on wine,

raises the price of each pound of tea and bottle of wine which he

consumes, by that and more than that amount, can not, indeed, be denied;

it is the fact, and is intended to be so, and he himself, at times, is

perfectly aware of it; but it makes hardly any impression on his practical

feelings and associations, serving to illustrate the distinction between

what is merely known to be true and what is felt to be so. The

unpopularity of direct taxation, contrasted with the easy manner in which

the public consent to let themselves be fleeced in the prices of

commodities, has generated in many friends of improvement a directly

opposite mode of thinking to the foregoing. They contend that the very

reason which makes direct taxation disagreeable makes it preferable. Under

it every one knows how much he really pays; and, if he votes for a war, or

any other expensive national luxury, he does so with his eyes open to what

it costs him. If all taxes were direct, taxation would be much more

perceived than at present, and there would be a security, which now there

is not, for economy in the public expenditure.

Although this argument is not without force, its weight is likely to be

constantly diminishing. The real incidence of indirect taxation is every

day more generally understood and more familiarly recognized. The mere

distinction between paying money directly to the tax-collector and

contributing the same sum through the intervention of the tea-dealer or

the wine-merchant no longer makes the whole difference between dislike or

opposition and passive acquiescence.

If our present revenue [of $400,000,000 in 1883] were all raised by direct

taxes, an extreme dissatisfaction would certainly arise at having to pay

so much; but while men’s minds are so little guided by reason, as such a

change of feeling from so irrelevant a cause would imply, so great an

aversion to taxation might not be an unqualified good. Of the

[$400,000,000] in question, nearly [$60,000,000] are pledged, under the

most binding obligations, to those whose property has been borrowed and

spent by the state; and, while this debt remains unredeemed, a greatly

increased impatience of taxation would involve no little danger of a

breach of faith. That part, indeed, of the public expenditure which is

devoted to the maintenance of civil and military establishments

[$206,000,000] (that is, all except the interest of the national debt),

affords, in many of its details, ample scope for retrenchment. If so great

an addition were made to the public dislike of taxation as might be the

consequence of confining it to the direct form, the classes who profit by

the misapplication of public money might probably succeed in saving that

by which they profit, at the expense of that which would only be useful to

the public.

There is, however, a frequent plea in support of indirect taxation, which

must be altogether rejected as grounded on a fallacy. We are often told

that taxes on commodities are less burdensome than other taxes, because

the contributor can escape from them by ceasing to use the taxed

commodity. He certainly can, if that be his object, deprive the Government

of the money; but he does so by a sacrifice of his own indulgences, which

(if he chose to undergo it) would equally make up to him for the same

amount taken from him by direct taxation. Suppose a tax laid on wine,

sufficient to add [$25] to the price of the quantity of wine which he

consumes in a year. He has only (we are told) to diminish his consumption

of wine by [$25], and he escapes the burden. True, but if the [$25],

instead of being laid on wine, had been taken from him by an income-tax,

he could, by expending [$25] less in wine, equally save the amount of the

tax, so that the difference between the two cases is really illusory. If

the Government takes from the contributor [$25] a year, whether in one way

or another, exactly that amount must be retrenched from his consumption to

leave him as well off as before; and in either way the same amount of

sacrifice, neither more nor less, is imposed on him.

On the other hand, it is some advantage on the side of indirect taxes that

what they exact from the contributor is taken at a time and in a manner

likely to be convenient to him. It is paid at a time when he has at any

rate a payment to make; it causes, therefore, no additional trouble, nor

(unless the tax be on necessaries) any inconvenience but what is

inseparable from the payment of the amount. He can also, except in the

case of very perishable articles, select his own time for laying in a

stock of the commodity, and consequently for payment of the tax. The

producer or dealer who advances these taxes is, indeed, sometimes

subjected to inconvenience; but, in the case of imported goods, this

inconvenience is reduced to a minimum by what is called the Warehousing

System, under which, instead of paying the duty at the time of

importation, he is only required to do so when he takes out the goods for

consumption, which is seldom done until he has either actually found, or

has the prospect of immediately finding, a purchaser.

The strongest objection, however, to raising the whole or the greater part

of a large revenue by direct taxes, is the impossibility of assessing them

fairly without a conscientious co-operation on the part of the

contributors, not to be hoped for in the present low state of public

morality. In the case of an income-tax, we have already seen that, unless

it be found practicable to exempt savings altogether from the tax, the

burden can not be apportioned with any tolerable approach to fairness upon

those whose incomes are derived from business or professions; and this is

in fact admitted by most of the advocates of direct taxation who, I am

afraid, generally get over the difficulty by leaving those classes

untaxed, and confining their projected income-tax to “realized property,”

in which form it certainly has the merit of being a very easy form of

plunder. But enough has been said in condemnation of this expedient. We

have seen, however, that a house-tax is a form of direct taxation not

liable to the same objections as an income-tax, and indeed liable to as

few objections of any kind as perhaps any of our indirect taxes. But it

would be impossible to raise, by a house-tax alone, the greatest part of

the revenue, without producing a very objectionable overcrowding of the

population, through the strong motive which all persons would have to

avoid the tax by restricting their house accommodation.

A certain amount of revenue may, as we have seen, be obtained without

injustice by a peculiar tax on rent. Besides (1) the land-tax,(346) and

(2) an equivalent for the revenue derived from stamp duties on the

conveyance of land, some further taxation might, I have contended, at some

future period be imposed, (3) to enable the state to participate in the

progressive increase of the incomes of landlords from natural causes. (4)

Legacies and inheritances, we have also seen, ought to be subjected to

taxation sufficient to yield a considerable revenue. With these taxes, and

(5) a house-tax of suitable amount, we should, I think, have reached the

prudent limits of direct taxation. The remainder of the revenue would have

to be provided by taxes on consumption, and the question is, which of

these are the least objectionable.

§ 2. What forms of indirect taxation are most eligible?

There are some forms of indirect taxation which must be peremptorily

excluded. (1.) Taxes on commodities, for revenue purposes, must not

operate as protecting duties, but must be levied impartially on every mode

in which the articles can be obtained, whether produced in the country

itself, or imported. (2.) An exclusion must also be put upon all taxes on

the necessaries of life, or on the materials or instruments employed in

producing those necessaries. Such taxes are always liable to encroach on

what should be left untaxed, the incomes barely sufficient for healthful

existence; and on the most favorable supposition, namely, that wages rise

to compensate the laborers for the tax, it operates as a peculiar tax on

profits, which is at once unjust and detrimental to national wealth.(347)

What remain are taxes on luxuries. And these have some properties which

strongly recommend them. In the first place, they can never, by any

possibility, touch those whose whole income is expended on necessaries;

while they do reach those by whom what is required for necessaries is

expended on indulgences. In the next place, they operate in some cases as

a useful, and the only useful, kind of sumptuary law. A great portion of

the expense of the higher and middle classes in most countries is not

incurred for the sake of the pleasure afforded by the things on which the

money is spent, but from regard to opinion, and an idea that certain

expenses are expected from them, as an appendage of station; and I can not

but think that expenditure of this sort is a most desirable subject of

taxation. When a thing is bought, not for its use but for its costliness,

cheapness is no recommendation.

§ 3. Practical rules for indirect taxation.

In order to reduce as much as possible the inconveniences, and increase

the advantages, incident to taxes on commodities, the following are the

practical rules which suggest themselves: 1. To raise as large a revenue

as conveniently may be, from those classes of luxuries which have most

connection with vanity, and least with positive enjoyment; such as the

more costly qualities of all kinds of personal equipment and ornament. But

with regard to horses and carriages, as there are many persons to whom,

from health or constitution, these are not so much luxuries as

necessaries, the tax paid by those who have but one riding-horse, or but

one carriage, especially of the cheaper descriptions, should be low; while

taxation should rise very rapidly with the number of horses and carriages,

and with their costliness. 2. Whenever possible, to demand the tax, not

from the producer, but directly from the consumer, since, when levied on

the producer, it raises the price always by more, and often by much more,

than the mere amount of the tax. 3. But as the only indirect taxes which

yield a large revenue are those which fall on articles of universal or

very general consumption, and as it is therefore necessary to have some

taxes on real luxuries, that is, on things which afford pleasure in

themselves, and are valued on that account rather than for their cost,

these taxes should, if possible, be so adjusted as to fall with the same

proportional weight on small, on moderate, and on large incomes. This is

not an easy matter; since the things which are the subjects of the more

productive taxes are in proportion more largely consumed by the poorer

members of the community than by the rich. Tea, coffee, sugar, tobacco,

fermented drinks, can hardly be so taxed that the poor shall not bear more

than their due share of the burden. Something might be done by making the

duty on the superior qualities, which are used by the richer consumers,

much higher in proportion to the value; but in some cases the difficulty

of at all adjusting the duty to the value, so as to prevent evasion, is

said, with what truth I know not, to be insuperable; so that it is thought

necessary to levy the same fixed duty on all the qualities alike. 4. As

far as is consistent with the preceding rules, taxation should rather be

concentrated on a few articles than diffused over many, in order that the

expenses of collection may be smaller, and that as few employments as

possible may be burdensomely and vexatiously interfered with. 5. Among

luxuries of general consumption, taxation should by preference attach

itself to stimulants, because these, though in themselves as legitimate

indulgences as any others, are more liable than most others to be used in

excess, so that the check to consumption, naturally arising from taxation,

is on the whole better applied to them than to other things. 6. As far as

other considerations permit, taxation should be confined to imported

articles, since these can be taxed with a less degree of vexatious

interference, and with fewer incidental bad effects, than when a tax is

levied on the field or on the workshop. Custom duties are, _cæteris

paribus_, much less objectionable than excise: but they must be laid only

on things which either can not, or at least will not, be produced in the

country itself; or else their production there must be prohibited (as in

England is the case with tobacco), or subjected to an excise duty of

equivalent amount. 7. No tax ought to be kept so high as to furnish a

motive to its evasion, too strong to be counteracted by ordinary means of

prevention; and especially no commodity should be taxed so highly as to

raise up a class of lawless characters—smugglers, illicit distillers, and

the like.

The experience of the United States is pregnant with lessons in

this direction. During the war we imposed an internal-revenue tax

on distilled spirits of so large an amount that it not only

produced less revenue than a smaller tax would have done, but it

created gigantic frauds, public corruption, and infinite devices

to escape the payment. The following table will show how the

production, as indicated by the tax, fell off when the tax was

excessive. It forced evasions by distillers. It has been found by

various experiences that with a less rate the revenue is largely

increased.

Year. Revenue. Production Amount of tax.

indicated

by the tax

(gallons).

1862-1863 $3,200,000 16,000,000 July, 1862, 20 c.

per gallon.

1867-1868 14,200,000 7,000,000 Jan., 1865, $2 per

gallon.

1868-1869 34,200,000 16,000,000 July, 1868, 50 c.

per gallon.

1869-1870 39,200,000 18,000,000

The actual amount reached by taxation is very much less than that

known to be actually used by from ten to fifteen millions of

gallons, or nearly one half the product. The openness of the

frauds can be judged by the fact that proof spirits were “openly

sold in the market, and even quoted in price-currents, at from

five to fifteen cents less per gallon than the rate of tax and the

average cost of manufacture.”(348)

In what manner the finer articles of manufacture, consumed by the rich,

might most advantageously be taxed, I must leave to be decided by those

who have the requisite practical knowledge. The difficulty would be, to

effect it without an inadmissible degree of interference with production.

In countries which, like the United States, import the principal part of

the finer manufactures which they consume, there is little difficulty in

the matter; and, even where nothing is imported but the raw material, that

may be taxed, especially the qualities of it which are exclusively

employed for the fabrics used by the richer class of consumers. Thus, in

England a high custom duty on raw silk would be consistent with principle;

and it might perhaps be practicable to tax the finer qualities of cotton

or linen yarn, whether spun in the country itself or imported.

§ 4. Taxation systems of the United States and other Countries.

It will now well repay study to examine Chart No. XXI, which shows

in what manner the United States have raised their revenues, and

to consider how far the right rules of taxation have been

followed.

I. For means of comparison, I shall give the last annual budget of

the United States in order to make clear from what sources the

country derives its revenues:

Chart XXI.

United States Budget, Year Ending June 30, 1883.

[In millions and tenths of millions.]

_Receipts:_

Customs $214.7

Internal revenue 144.7

Direct tax .1

Sale of public lands 7.9

Miscellaneous 30.8

Net ordinary receipts $398.2

_Expenditures:_

War Department $48.9

Navy Department 15.3

Indians 7.3

Pensions 66.0

Miscellaneous 68.7

Net ordinary expenditures $206.2

Interest on public debt 59.2

Total $265.4

This leaves a surplus of $132,839,444 above all expenditures, and

our problem is now where to reduce taxation. The annual interest

charge is lessening with the payment of the public debt, having

fallen from its highest figure of $143,781,591 in 1867, to

$59,160,131 in 1883.(349) Our national taxation is practically all

indirect, that of internal taxation being chiefly levied on

tobacco and distilled spirits, and our customs falling on almost

all articles which can be imported, materials as well as

manufactures.

In the United States direct taxation on real and personal property

is very generally levied for State, county, and municipal

purposes. In fact, nearly all the perceptible taxation is the

property tax, and, inasmuch as the State and county tax is very

light, the burden is almost always owing to municipal and town

expenditures. People do not seem to be aware of the enormous

national burden, because the taxes are indirect, and only increase

the prices of commodities. Other countries, it will be seen, make

a greater use of direct taxation than the United States. In fact,

the comparison of the ways by which different countries collect

their revenues may naturally show us where we may gain by their

experience.

II. The English system is especially interesting, because, after

having had an extended scheme of customs duties, they abandoned

it, and raised their revenue, some on imported articles, it is

true (generally on those which could not be produced in England),

but by the income-tax, and other forms.(350)

In 1842 Sir Robert Peel found 1,200 articles subject to

customs-duties. He began (1) by removing all prohibitions; (2) by

reducing duties on raw materials to 5 per cent or less; (3) by

limiting the rates on partially manufactured goods to 12 per cent;

and (4) those on wholly manufactured goods to 20 per cent. Now

customs-duties are levied only on beer, cards, chiccory,

chocolate, cocoa, coffee, dried fruit, plate, spirits, tea,

tobacco, and wine. The following budget gives the sources of

revenue for Great Britain:(351)

Budget Of Great Britain, 1883.

[In millions and tenths of millions.]

_Receipts:_

Customs $98.4

Excise (such as on tobacco and 134.9

spirits)

Stamps 58.5

Land tax 5.2

House duty 8.9

Income tax 60.9

Post-Office 36.5

Telegraph 8.6

Crown lands 2.0

Interest (on loans, Suez 6.1

Canal, etc.)

Miscellaneous 26.4

Total $446.4

_Expenditures:_

Interest on national debt $148.4

Army, navy, etc. 157.1

Cost of revenue departments 45.1

Public works 9.1

Public departments, salaries, 12.5

etc.

Law and justice 35.7

Education, science, and art 22.9

Colonial and consular 3.4

Civil list 2.0

Pensions 2.0

Miscellaneous 6.8

Total expenditures $445.0

From this it will be seen that in the land, income, and house

taxes, Great Britain raises by direct taxation about $75,000,000,

and in customs and excise, by indirect taxation, about

$233,000,000.

III. The following is the system adopted by Germany (Prussia):

German Budget, 1881-1882.

[In millions and tenths of millions.]

_Receipts:_

(1.) Property income from $11.7

domains and forests

From mines and salt-works 2.5

From railways 22.5

Miscellaneous 5.0

$41.7

(2.) Royal Lottery 1.0

(3.) Bureau of Justice $12.7

Harbors and bridges .5

13.2

(4.) Direct taxes $35.5

(5.) Indirect taxes (for 12.3

Prussia)

Total receipts $103.6

_Expenditures:_

(1.) Civil list 3.0

(2.) Debt 25.0

(3.) Various ministries, 49.5

schools, etc.

(4.) Pensions 4.0

(5.) Miscellaneous 19.5

Total expenditures(352) $101.0

The Prussian _direct_ taxes include (1) a land-tax, (2) a

house-tax, (3) an income-tax, (4) a class-tax, (5) a trade-tax,

and (6) miscellaneous taxes.

IV. How the French supply themselves may be seen by the following

statement:(353)

French Budget, 1881.

[In millions and tenths of millions.]

_Receipts:_

Direct taxes $75.9

Similar taxes 4.7

Registry, stamps, etc 135.1

Forests 7.6

Customs (and salt duty $3.5) 65.4

Indirect taxes (including 209.7

tobacco)

Post-Office and telegraph 27.2

Miscellaneous 29.8

Total receipts $555.4

_Expenditures:_

Public debt, etc. $249.0

General functions of the 243.7

ministries

Administrative expenses, cost 58.5

of revenue collections, etc.

Miscellaneous 3.5

Total expenditures $554.7

The direct taxes are (1) on property; (2) one nearly like our

poll-tax together with a species of income-tax; (3) a tax on doors

and windows; and (4) one on licenses.

§ 5. A _Résumé_ of the general principles of taxation.

After the manner of our classification and _résumé_ of the subject of

value and money, it may be convenient to here insert a recapitulation of

the various principles under the treatment of taxation.(354)

Comparison Between Direct And Indirect Taxation.

Adam Smith’s “Canons of Taxation.”—A tax should be: I. _Equal_ (in amount

of _sacrifice_ entailed). II. _Certain._ III. _Timely._ IV. _All for the

state._

A Tax is either:

Direct.

Indirect (on commodities.)

Direct taxes are:

On Income.

On Expenditure.

Taxes on Income are:

General.

Special.

General income taxes. The best of taxes, if people were all honest. As it

is, it falls most heavily on the conscientious. Should be reserved for

emergency. All _savings_ and a fixed amount in _all_ incomes should be

exempt.

Special taxes are on:

Rent.

Wages.

Profits.

Taxes on Rent. Agricultural rent is meant. It falls entirely on the

landlord, and, if not balanced by taxes on other classes, is unjust. May

be blended with a tax on profits, if on rent due to landlord’s

improvements.

Taxes on Wages are:

On Skilled.

On Unskilled.

Skilled wages are at a monopoly price, and taxes on them are paid by the

laborers, so long as wages are not reduced below their just proportion.

Unskilled wages. (1) _Population diminished by it._ Paid by profits. (2)

_Population left stationary._ Shared between profits and wages. (3)

_Population increasing in spite of it._ Falls entirely on wages.

Taxes on Profits. May possible stimulate production, and is then a good

all round, contributing to the state, and leaving no one any poorer. If

not, if profits are really diminished by the tax, capital may be

diminished also. This (a) may, or (b) may not diminish population. If (a),

then the margin of cultivation ceases to be extended, and part of the tax,

_pro tanto_, falls on the landlords. If (b), then wages fall, and part of

the tax falls on the laborer. Total result is a nearer approach to the

stationary state.

Taxes on Expenditure are open to the same objections as the general

income-tax. They may be:

Assessed taxes.

House-tax.

Assessed taxes, such as on servants, dogs, etc. These are rigidly

_direct_.

House-taxes are:

On building-rent.

On ground-rent.

House-taxes on building-rent are paid by occupier. This tax is _indirect_.

House-taxes on ground-rent are (1.) with, or (2.) without an equivalent

tax on agricultural rent. (1.) Are paid by ground landlord wholly, and

therefore _direct_. (2.) Are part by occupier, and therefore _indirect_.

Indirect taxes are: Excise,

Customs, or

Tolls.

Indirect taxes may be on (1.) Long or (2.) Short investments of capital.

Indirect taxes on Long investments are always unadvisable, in view of

Canon IV.

Indirect taxes on Short investments are subject to the laws of indirect

taxation. 1. Tax vanities rather than positive enjoyments (e.g., liveries

rather than servants). 2. The consumer and not the producer should pay the

tax collector (Canon IV). That is, collect the tax as near the actual

consumer as possible. 3. Taxes on real enjoyments to be kept as equal as

possible for large and small means. 4. Tax as few articles as possible.

England taxes only a very small number of imports. The United States taxes

nearly everything imported. 5. Tax stimulants freely. The United States

collect $91,000,000 from spirits and liquors, and $42,000,000 from tobacco

(1883). 6. Tax imports of commodities not made at home, or whose home

production is under an excise (internal revenue) duty equal to the customs

tax. 7. Keep the rate of tax low, in order to get most revenue.

Chapter V. Of A National Debt.

§ 1. Is it desirable to defray extraordinary public expenses by loans?

The question must now be considered, how far it is right or expedient to

raise money for the purposes of government, not by laying on taxes to the

amount required, but by taking a portion of the capital of the country in

the form of a loan, and charging the public revenue with only the

interest.

This question has already been touched upon in the First Book.(355) We

remarked, that if the capital taken in loans is abstracted from funds

either engaged in production, or destined to be employed in it, their

diversion from that purpose is equivalent to taking the amount from the

wages of the laboring-classes. Borrowing, in this case, is not a

substitute for raising the supplies within the year. A government which

borrows does actually take the amount within the year, and that too by a

tax exclusively on the laboring-classes, than which it could have done

nothing worse, if it had supplied its wants by avowed taxation; and in

that case the transaction, and its evils, would have ended with the

emergency; while, by the circuitous mode adopted, the value exacted from

the laborers is gained, not by the state, but by the employers of labor,

the state remaining charged with the debt besides, and with its interest

in perpetuity. The system of public loans, in such circumstances, may be

pronounced the very worst which, in the present state of civilization, is

still included in the catalogue of financial expedients.

We, however, remarked that there are other circumstances in which loans

are not chargeable with these pernicious consequences: namely, first, when

what is borrowed is foreign capital, the overflowings of the general

accumulation of the world; or, secondly, when it is capital which either

would not have been saved at all, unless this mode of investment had been

open to it, or, after being saved, would have been wasted in unproductive

enterprises, or sent to seek employment in foreign countries. When the

progress of accumulation has reduced profits either to the ultimate or to

the practical minimum—to the rate less than which would either put a stop

to the increase of capital, or send the whole of the new accumulations

abroad—government may annually intercept these new accumulations, without

trenching on the employment or wages of the laboring-classes in the

country itself, or perhaps in any other country. To this extent,

therefore, the loan system may be carried, without being liable to the

utter and peremptory condemnation which is due to it when it overpasses

this limit. What is wanted is an index to determine whether, in any given

series of years, as during the last great war, for example, the limit has

been exceeded or not.

Such an index exists, at once a certain and an obvious one. Did the

Government, by its loan operations, augment the rate of interest? If it

only opened a channel for capital which would not otherwise have been

accumulated, or which, if accumulated, would not have been employed within

the country, this implies that the capital, which the Government took and

expended, could not have found employment at the existing rate of

interest. So long as the loans do no more than absorb this surplus, they

prevent any tendency to a fall of the rate of interest, but they can not

occasion any rise. [But] To the full extent to which the loans of

government, during the war, caused the rate of interest to exceed what it

was before, and what it has been since, those loans are chargeable with

all the evils which have been described. If it be objected that interest

only rose because profits rose, I reply that this does not weaken, but

strengthens, the argument. If the Government loans produced the rise of

profits by the great amount of capital which they absorbed, by what means

can they have had this effect, unless by lowering the wages of labor? It

will, perhaps, be said that what kept profits high during the war was not

the drafts made on the national capital by the loans, but the rapid

progress of industrial improvements. This, in a great measure, was the

fact; and it, no doubt, alleviated the hardship to the laboring-classes,

and made the financial system which was pursued less actively mischievous,

but not less contrary to principle. These very improvements in industry

made room for a larger amount of capital; and the Government, by draining

away a great part of the annual accumulations, did not indeed prevent that

capital from existing ultimately (for it started into existence with great

rapidity after the peace), but prevented it from existing at the time, and

subtracted just so much, while the war lasted, from distribution among

productive laborers. If the Government had abstained from taking this

capital by loan, and had allowed it to reach the laborers, but had raised

the supplies which it required by a direct tax on the laboring-classes, it

would have produced (in every respect but the expense and inconvenience of

collecting the tax) the very same economical effects which it did produce,

except that we should not now have had the debt. The course it actually

took was therefore worse than the very worst mode which it could possibly

have adopted of raising the supplies within the year; and the only excuse,

or justification, which it admits of (so far as that excuse could be truly

pleaded) was hard necessity; the impossibility of raising so enormous an

annual sum by taxation, without resorting to taxes which from their

odiousness, or from the facility of evasion, it would have been found

impracticable to enforce.(356)

When government loans are limited to the overflowings of the national

capital, or to those accumulations which would not take place at all

unless suffered to overflow, they are at least not liable to this grave

condemnation. In this case, therefore, the question really is, what it is

commonly supposed to be in all cases—namely, a choice between a great

sacrifice at once, and a small one indefinitely prolonged. On this matter

it seems rational to think that the prudence of a nation will dictate the

same conduct as the prudence of an individual; to submit to as much of the

privation immediately as can easily be borne, and, only when any further

burden would distress or cripple them too much, to provide for the

remainder by mortgaging their future income. It is an excellent maxim to

make present resources suffice for present wants; the future will have its

own wants to provide for. On the other hand, it may reasonably be taken

into consideration that, in a country increasing in wealth, the necessary

expenses of government do not increase in the same ratio as capital or

population; any burden, therefore, is always less and less felt; and,

since those extraordinary expenses of government which are fit to be

incurred at all are mostly beneficial beyond the existing generation,

there is no injustice in making posterity pay a part of the price, if the

inconvenience would be extreme of defraying the whole of it by the

exertions and sacrifices of the generation which first incurred it.

§ 2. Not desirable to redeem a national Debt by a general Contribution.

When a country, wisely or unwisely, has burdened itself with a debt, is it

expedient to take steps for redeeming that debt? In principle it is

impossible not to maintain the affirmative.

Two modes have been contemplated of paying off a national debt: either at

once by a general contribution, or gradually by a surplus revenue. The

first would be incomparably the best, if it were practicable; and it would

be practicable if it could justly be done by assessment on property alone.

If property bore the whole interest of the debt, property might, with

great advantage to itself, pay it off; since this would be merely

surrendering to a creditor the principal sum, the whole annual proceeds of

which were already his by law, and would be equivalent to what a

land-owner does when he sells part of his estate, to free the remainder

from a mortgage. But property, it need hardly be said, does not pay, and

can not justly be required to pay, the whole interest of the debt.

Whatever is the fitting contribution from property to the general expenses

of the state, in the same, and in no greater proportion, should it

contribute toward either the interest or the repayment of the national

debt. This, however, if admitted, is fatal to any scheme for the

extinction of the debt by a general assessment on the community. Persons

of property could pay their share of the amount by a sacrifice of

property, and have the same net income as before.

[Illustration.]

If a person owns a property, A B, which returns him $1,000 income,

and if he pays $10 a year in taxes as his share of interest on the

public debt, suppose that part of his estate represented by X,

which returns him annually $10 (and which return he has annually

handed over to the state), to be carved out of it, and that he is

to be hereafter relieved of his share of taxes. He would then,

after having paid the capitalized value (X) of that which was his

share of the annual tax to the state on account of the public

debt, have the same net income as before; for he was never able to

enjoy the income of X.

If those who have no accumulations, but only incomes, were required to

make up by a single payment the equivalent of the annual charge laid on

them by the taxes maintained to pay the interest of the debt, they could

only do so by incurring a private debt equal to their share of the public

debt; while, from the insufficiency, in most cases, of the security which

they could give, the interest would amount to a much larger annual sum

than their share of that now paid by the state. Besides, a collective debt

defrayed by taxes has, over the same debt parceled out among individuals,

the immense advantage that it is virtually a mutual insurance among the

contributors. If the fortune of a contributor diminishes, his taxes

diminish; if he is ruined, they cease altogether, and his portion of the

debt is wholly transferred to the solvent members of the community. If it

were laid on him as a private obligation, he would still be liable to it,

even when penniless.

When the state possesses property, in land or otherwise, which there are

not strong reasons of public utility for its retaining at its disposal,

this should be employed, as far as it will go, in extinguishing debt. Any

casual gain, or god-send, is naturally devoted to the same purpose. Beyond

this, the only mode which is both just and feasible, of extinguishing or

reducing a national debt, is by means of a surplus revenue.

§ 3. In what cases desirable to maintain a surplus revenue for the

redemption of Debt.

The desirableness, _per se_, of maintaining a surplus for this purpose

does not, I think, admit of a doubt.

It is not, however, advisable in all cases to maintain a surplus revenue

for the extinction of debt. The advantage of paying off the national debt

is, that it would enable us to get rid of the worst half of our taxation.

But of this worst half some portions must be worse than others, and to get

rid of those would be a greater benefit proportionally than to get rid of

the rest. If renouncing a surplus revenue would enable us to dispense with

a tax, we ought to consider the very worst of all our taxes as precisely

the one which we are keeping up for the sake of ultimately abolishing

taxes not so bad as itself. In a country advancing in wealth, whose

increasing revenue gives it the power of ridding itself from time to time

of the most inconvenient portions of its taxation, I conceive that the

increase of revenue should rather be disposed of by taking off taxes, than

by liquidating debt, as long as any very objectionable imposts remain. In

the present state of England, therefore, I hold it to be good policy in

the Government, when it has a surplus of an apparently permanent

character, to take off taxes, provided these are rightly selected. Even

when no taxes remain but such as are not unfit to form part of a permanent

system, it is wise to continue the same policy by experimental reductions

of those taxes, until the point is discovered at which a given amount of

revenue can be raised with the smallest pressure on the contributors.

After this, such surplus revenue as might arise from any further increase

of the produce of the taxes should not, I conceive, be remitted, but

applied to the redemption of debt. Eventually, it might be expedient to

appropriate the entire produce of particular taxes to this purpose; since

there would be more assurance that the liquidation would be persisted in,

if the fund destined to it were kept apart, and not blended with the

general revenues of the state. The succession duties would be peculiarly

suited to such a purpose, since taxes paid as they are, out of capital,

would be better employed in reimbursing capital than in defraying current

expenditure. If this separate appropriation were made, any surplus

afterward arising from the increasing produce of the other taxes, and from

the saving of interest on the successive portions of debt paid off, might

form a ground for a remission of taxation.

The relative amount of the United States public debt may be seen,

by Chart No. XXII, from an early date down to 1880. Since the war,

the surplus revenue of the United States has been constantly

appropriated for the payment of the public debt incurred during

the late war, until, what with the reduction of debt and the fall

in the interest charge, our income is now so much greater than

expenditure that we are (1884) actually in difficulties owing to

the surplus. To the present time the Treasury has been able to use

its excess of receipts in redeeming matured debt; but the rapidity

of the payment has been such that in two years or more no matured

debt will exist to be redeemed: $250,000,000 of 4-½ per cent bonds

remain, but they do not fall due until 1891; and the 4 per cent

bonds to the amount of $737,620,700 do not mature until 1907.

Having once raised a large revenue under war pressure, it seems

very difficult for people to understand now why heavy duties were

originally levied, and the extraordinary suggestion is often made

that the surplus should remain, and new channels of expenditure

should be made (such as enormous pensions), simply in order to

keep up the heavy taxation. The difficulty is, however, that the

unnecessary surplus exists because of customs duties levied for

war purposes. But the heavy burden of war taxation ought not to be

continued, adding to the cost of production in all industries,

without doing a greater wrong than would be done by the

passing—and only possible—trouble of a redistribution of capital

in a few cases; especially since that distribution of capital will

be one from less productive to more productive industries;

otherwise, no change would be made.

The condition of foreign debts, and the progress made in their

reduction, may be studied in Chart No. XXIII. That of the United

States is exceptional. The interest-bearing debt, as given by the

last report of the Secretary of the Treasury, 1883, has been

reduced to $1,312,446,050, and the reduction is more striking than

is indicated in the chart for the year 1880.

[Illustration: Chart XXIII.]

Chart XXIII. Reduction of National Debts in Various Countries.

Chapter VI. Of An Interference Of Government Grounded On Erroneous

Theories.

§ 1. The doctrine of Protection to Native Industry.

We proceed to the functions of government which belong to what I have

termed, for want of a better designation, the optional class; those which

are sometimes assumed by governments and sometimes not, and which it is

not unanimously admitted that they ought to exercise. We will begin by

passing in review false theories which have from time to time formed the

ground of acts of government more or less economically injurious.

Of these false theories, the most notable is the doctrine of Protection to

Native Industry—a phrase meaning the prohibition, or the discouragement by

heavy duties, of such foreign commodities as are capable of being produced

at home. If the theory involved in this system had been correct, the

practical conclusions grounded on it would not have been unreasonable. The

theory was that, to buy things produced at home was a national benefit,

and the introduction of foreign commodities generally a national loss. It

being at the same time evident that the interest of the consumer is to buy

foreign commodities in preference to domestic whenever they are either

cheaper or better, the interest of the consumer appeared in this respect

to be contrary to the public interest; he was certain, if left to his own

inclinations, to do what according to the theory was injurious to the

public.

It was shown, however, in our analysis of the effects of international

trade, as it had been often shown by former writers, that the importation

of foreign commodities, in the common course of traffic, never takes place

except when it is, economically speaking, a national good, by causing the

same amount of commodities to be obtained at a smaller cost of labor and

capital to the country. To prohibit, therefore, this importation, or

impose duties which prevent it, is to render the labor and capital of the

country less efficient in production than they would otherwise be, and

compel a waste of the difference between the labor and capital necessary

for the home production of the commodity and that which is required for

producing the things with which it can be purchased from abroad. The

amount of national loss thus occasioned is measured by the excess of the

price at which the commodity is produced over that at which it could be

imported. In the case of manufactured goods the whole difference between

the two prices is absorbed in indemnifying the producers for waste of

labor, or of the capital which supports that labor. Those who are supposed

to be benefited, namely, the makers of the protected articles (unless they

form an exclusive company, and have a monopoly against their own

countrymen as well as against foreigners), do not obtain higher profits

than other people. All is sheer loss to the country as well as to the

consumer.

Of the industries in a country some are said to “need protection”

and others not—that is, those industries which are carried on at a

relative disadvantage are the only ones which need protection in

order that they may continue in operation. By relative

disadvantage is meant a greater relative cost, or sacrifice, to

the same amount of labor and capital. Those industries which can

not yield so great a value for the labor and capital engaged in

them as other more profitable industries are those which are said

to “need protection.” Wherever protective duties exist it is

implied by those who lay them on that there production is carried

on under more onerous conditions than in other competing places or

occupations. After duties are thus supposed to have protected the

less advantageously situated occupations, it may be said that all

industries will then have an equal chance. “No doubt,” as Mr.

Cairnes says, “they would be equalized just as by compelling every

one to move about with a weight attached to his leg. The weight

would, indeed, be an impediment to locomotion, but, provided it

were in each case exactly proportioned to the strength of the limb

which drew it, no one ... would have any reason to complain. No

one would walk as fast as if his limbs were free, but then his

neighbor would be equally fettered, and, if it took him twice as

long to reach his destination as before, he would at least have

company on his journey.”(357)

§ 2. —had its origin in the Mercantile System.

The restrictive and prohibitory policy was originally grounded on what is

called the Mercantile System, which, representing the advantage of foreign

trade to consist solely in bringing money into the country, gave

artificial encouragement to exportation of goods, and discountenanced

their importation. The only exceptions to the system were those required

by the system itself. The materials and instruments of production were the

subject of a contrary policy, directed, however, to the same end; they

were freely imported, and not permitted to be exported, in order that

manufacturers, being more cheaply supplied with the requisites of

manufacture, might be able to sell cheaper, and therefore to export more

largely. For a similar reason importation was allowed and even favored,

when confined to the productions of countries which were supposed to take

from the country still more than it took from them, thus enriching it by a

favorable balance of trade. As part of the same system colonies were

founded, for the supposed advantage of compelling them to buy our

commodities, or at all events not to buy those of any other country: in

return for which restriction we were generally willing to come under an

equivalent obligation with respect to the staple productions of the

colonists. The consequences of the theory were pushed so far that it was

not unusual even to give bounties on exportation, and induce foreigners to

buy from [England] rather than from other countries by a cheapness which

[England] artificially produced, by paying part of the price for them out

of [their] own taxes. This is a stretch beyond the point yet reached by

any private tradesman in his competition for business. No shopkeeper, I

should think, ever made a practice of bribing customers by selling goods

to them at a permanent loss, making it up to himself from other funds in

his possession.

The principle of the Mercantile Theory is now given up even by writers and

governments who still cling to the restrictive system. Whatever hold that

system has over men’s minds, independently of the private interests

exposed to real or apprehended loss by its abandonment, is derived from

fallacies other than the old notion of the benefits of heaping up money in

the country. The most effective of these is the specious plea of employing

our own countrymen and our national industry, instead of feeding and

supporting the industry of foreigners. The answer to this, from the

principles laid down in former chapters, is evident. Without reverting to

the fundamental theorem discussed in an early part of the present

treatise,(358) respecting the nature and sources of employment for labor,

it is sufficient to say, what has usually been said by the advocates of

free trade, that the alternative is not between employing our own people

and foreigners, but between employing one class and another of our own

people. The imported commodity is always paid for, directly or indirectly,

with the produce of our own industry: that industry being, at the same

time, rendered more productive, since, with the same labor and outlay, we

are enabled to possess ourselves of a greater quantity of the article.

Those who have not well considered the subject are apt to suppose that our

exporting an equivalent in our own produce, for the foreign articles we

consume, depends on contingencies—on the consent of foreign countries to

make some corresponding relaxation of their own restrictions, or on the

question whether those from whom we buy are induced by that circumstance

to buy more from us; and that, if these things, or things equivalent to

them, do not happen, the payment must be made in money. Now, in the first

place, there is nothing more objectionable in a money payment than in

payment by any other medium, if the state of the market makes it the most

advantageous remittance; and the money itself was first acquired, and

would again be replenished, by the export of an equivalent value of our

own products. But, in the next place, a very short interval of paying in

money would so lower prices as either to stop a part of the importation,

or raise up a foreign demand for our produce, sufficient to pay for the

imports. I grant that this disturbance of the equation of international

demand would be in some degree to our disadvantage, in the purchase of

other imported articles; and that a country which prohibits some foreign

commodities, does, _cæteris paribus_, obtain those which it does not

prohibit at a less price than it would otherwise have to pay. To express

the same thing in other words: a country which destroys or prevents

altogether certain branches of foreign trade, thereby annihilating a

general gain to the world, which would be shared in some proportion

between itself and other countries, does, in some circumstances, draw to

itself, at the expense of foreigners, a larger share than would else

belong to it of the gain arising from that portion of its foreign trade

which it suffers to subsist. But even this it can only be enabled to do,

if foreigners do not maintain equivalent prohibitions or restrictions

against its commodities. In any case, the justice or expediency of

destroying one of two gains, in order to engross a rather larger share of

the other, does not require much discussion; the gain, too, which is

destroyed, being, in proportion to the magnitude of the transactions, the

larger of the two, since it is the one which capital, left to itself, is

supposed to seek by preference.

§ 3. —supported by pleas of national subsistence and national defense.

Defeated as a general theory, the Protectionist doctrine finds support in

some particular cases from considerations which, when really in point,

involve greater interests than mere saving of labor—the interests of

national subsistence and of national defense.(359) The discussions on the

Corn Laws have familiarized everybody with the plea that we ought to be

independent of foreigners for the food of the people; and the Navigation

Laws were grounded, in theory and profession, on the necessity of keeping

up a “nursery of seamen” for the navy. On this last subject I at once

admit that the object is worth the sacrifice; and that a country exposed

to invasion by sea, if it can not otherwise have sufficient ships and

sailors of its own to secure the means of manning on an emergency an

adequate fleet, is quite right in obtaining those means, even at an

economical sacrifice in point of cheapness of transport. When the English

navigation laws were enacted, the Dutch, from their maritime skill and

their low rate of profit at home, were able to carry for other nations,

England included, at cheaper rates than those nations could carry for

themselves: which placed all other countries at a great comparative

disadvantage in obtaining experienced seamen for their ships of war. The

navigation laws, by which this deficiency was remedied, and at the same

time a blow struck against the maritime power of a nation with which

England was then frequently engaged in hostilities, were probably, though

economically disadvantageous, politically expedient. But English ships and

sailors can now navigate as cheaply as those of any other country,

maintaining at least an equal competition with the other maritime nations

even in their own trade. The ends which may once have justified navigation

laws require them no longer, and afford no reason for maintaining this

invidious exception to the general rule of free trade.

Since the introduction of steamships and the advance of invention

in naval contrivances, the plea for navigation laws on the ground

that they keep up a “nursery of seamen” for the navy is

practically obsolete. The “seaman” employed on the modern naval

ships more nearly resembles the artisan in a manufacturing

establishment; he need have but comparatively little knowledge of

the sea, since the days of sailing-vessels have passed by, so far

as naval warfare is concerned. Steam and mechanical appliances now

do what was before done by wind and sail.

While Mr. Mill thinks navigation laws were economically—that is,

so far as increase of wealth is concerned—disadvantageous, yet he

believes that they may have been “politically expedient.” It is

possible, for example, that retaliation by the United States and

other countries against England early in this century brought

about the remission of the English restrictions on foreign

shipping. But it is quite another thing to say that such laws

produced an ability to sail ships more cheaply. That the English

navigation acts of 1651 built up English shipping is not supported

by many proofs; whereas it is very distinctly shown that English

shipping languished and suffered under them.(360) Moreover, under

the _régime_ of steam and iron (which drew out England’s peculiar

advantages in iron and coal), in all its history English shipping

never prospered more than it has since the abolition in 1849 of

the navigation laws—events which have taken place since Mr. Mill

wrote.

The United States is still weighed down by navigation laws adapted

to mediæval conditions, and the relics of a time when retaliation

was the cause of their enactment. So long as wooden vessels did

the carrying-trade, the natural advantages of the United States

gave us a proud position on the ocean. Now, however, when it is a

question of cheaper iron, steel, and coal for vessels of iron and

steel, we are at a possible disadvantage, and the bulk of

navigation laws proposed in these days are intended to draw

capital either by raising prices through duties on ships and

materials, or by outright bounties and subsidies from industries

in which we have advantages, to building ships. And until of late

no distinction has been made between ship-building and ship-owning

(or ship-sailing). Within the last year (1884) many burdens on

ship-sailing have been removed; but even when we are permitted to

sail ships on equal terms with foreigners, we can not yet build

them with as small a cost as England (which is proved by the very

demand of the builders of iron vessels for the retention of

protective duties), and our laws do not as yet allow us to buy

ships abroad and sail them under our own flag.(361)

With regard to subsistence, the plea of the Protectionists has been so

often and so triumphantly met, that it requires little notice here. That

country is the most steadily as well as the most abundantly supplied with

food which draws its supplies from the largest surface. It is ridiculous

to found a general system of policy on so improbable a danger as that of

being at war with all the nations of the world at once; or to suppose

that, even if inferior at sea, a whole country could be blockaded like a

town, or that the growers of food in other countries would not be as

anxious not to lose an advantageous market as we should be not to be

deprived of their corn.

In countries in which the system of Protection is declining, but not yet

wholly given up, such as the United States, a doctrine has come into

notice which is a sort of compromise between free trade and restriction,

namely, that protection for protection’s sake is improper, but that there

is nothing objectionable in having as much protection as may incidentally

result from a tariff framed solely for revenue. Even in England regret is

sometimes expressed that a “moderate fixed duty” was not preserved on

corn, on account of the revenue it would yield. Independently, however, of

the general impolicy of taxes on the necessaries of life, this doctrine

overlooks the fact that revenue is received only on the quantity imported,

but that the tax is paid on the entire quantity consumed. To make the

public pay much, that the treasury may receive a little, is no eligible

mode of obtaining a revenue. In the case of manufactured articles the

doctrine involves a palpable inconsistency. The object of the duty as a

means of revenue is inconsistent with its affording, even incidentally,

any protection. It can only operate as protection in so far as it prevents

importation, and to whatever degree it prevents importation it affords no

revenue.

§ 4. —on the ground of encouraging young industries; colonial policy.

The only case in which, on mere principles of political economy,

protecting duties can be defensible, is when they are imposed temporarily

(especially in a young and rising nation) in hopes of naturalizing a

foreign industry, in itself perfectly suitable to the circumstances of the

country. The superiority of one country over another in a branch of

production often arises only from having begun it sooner. There may be no

inherent advantage on one part, or disadvantage on the other, but only a

present superiority of acquired skill and experience. A country which has

this skill and experience yet to acquire may in other respects be better

adapted to the production than those which were earlier in the field; and,

besides, it is a just remark of Mr. Rae that nothing has a greater

tendency to promote improvements in any branch of production than its

trial under a new set of conditions. But it can not be expected that

individuals should, at their own risk, or rather to their certain loss,

introduce a new manufacture, and bear the burden of carrying it on, until

the producers have been educated up to the level of those with whom the

processes are traditional. A protecting duty, continued for a reasonable

time, will sometimes be the least inconvenient mode in which the nation

can tax itself for the support of such an experiment. But the protection

should be confined to cases in which there is good ground of assurance

that the industry which it fosters will after a time be able to dispense

with it; nor should the domestic producers ever be allowed to expect that

it will be continued to them beyond the time necessary for a fair trial of

what they are capable of accomplishing.

The great difficulty with this proposal is that it introduces

(what is inconsistent with Mr. Mill’s general system) the

Socialistic basis of state-help, instead of self-help. If

industries will never support themselves, then, of course, it is a

misappropriation of the property of its citizens whenever a

government takes a slice by taxation from productive industries

and gives it to a less productive one to make up its deficiencies.

The only possible theory of protection to young industries is

that, if protected for a season, the industries may soon grow

strong and stand alone. Mr. Mill never contemplated anything else.

But the difficulty is constantly met with, in putting this theory

into practice, that the industry, once that it has learned to

depend on the help of the state, never reaches a stage when it is

willing to give up the assistance of the duties. Dependence on

legislation begets a want of self-reliance, and destroys the

stimulus to progress and good management. It is said: “There has

never been an instance in the history of the country where the

representatives of such industries, who have enjoyed protection

for a long series of years, have been willing to submit to a

reduction of the tariff, or have proposed it. But, on the

contrary, their demands for still higher and higher duties are

insatiable, and never intermitted.”(362) The question of fact, as

to whether or not the United States is indebted for its present

manufacturing position to protection when our industries were

young, seems to be capable of answer, and an answer which shows

that protection was imposed generally after the industries got a

foothold, and that very little assistance was derived from the

duties on imports.(363)

The following explanation by Mr. Mill(364) of the meaning put upon

his argument of protection to young industries by those who have

applied it to the United States will be of no slight interest:

“The passage has been made use of to show the inapplicability of free

trade to the United States, and for similar purpose in the Australian

colonies, erroneously in my opinion, but certainly with more plausibility

than can be the case in the United States, for Australia really is a new

country whose capabilities for carrying on manufactures can not yet be

said to have been tested; but the manufacturing parts of the United

States—New England and Pennsylvania—are no longer new countries; they have

carried on manufactures on a large scale, and with the benefit of high

protecting duties, for at least two generations; their operatives have had

full time to acquire the manufacturing skill in which those of England had

preceded them; there has been ample experience to prove that the alleged

inability of their manufactures to compete in the American market with

those of Great Britain does not arise merely from the more recent date of

their establishment, but from the fact that American labor and capital

can, in the present circumstances of America, be employed with greater

return, and greater advantage to the national wealth, in the production of

other articles. I have never for a moment recommended or countenanced any

protecting industry except for the purpose of enabling the protected

branch of industry, in a very moderate time, to become independent of

protection. That moderate time in the United States has been exceeded, and

if the cotton and iron of America still need protection against those of

the other hemisphere, it is in my eyes a complete proof that they aught

not to have it, and that the longer it is continued the greater the

injustice and the waste of national resources will be.”

There is only one part of the protectionist scheme which requires any

further notice: its policy toward colonies and foreign dependencies; that

of compelling them to trade exclusively with the dominant country. A

country which thus secures to itself an extra foreign demand for its

commodities, undoubtedly gives itself some advantage in the distribution

of the general gains of the commercial world. Since, however, it causes

the industry and capital of the colony to be diverted from channels which

are proved to be the most productive, inasmuch as they are those into

which industry and capital spontaneously tend to flow, there is a loss, on

the whole, to the productive powers of the world, and the mother-country

does not gain so much as she makes the colony lose. If, therefore, the

mother-country refuses to acknowledge any reciprocity of obligations, she

imposes a tribute on the colony in an indirect mode, greatly more

oppressive and injurious than the direct.

§ 5. —on the ground of high wages.

The discussion by Mr. Cairnes on the question of wages as affected

by the tariff is such that I have quoted it as fully as possible:

“The position taken in the United States is that protection is

only needed and only asked for where American industry is placed

under a disadvantage, as compared with the industry of foreign

countries.... The rates of wages measured in money are higher in

the United States than in Europe, and, therefore, it is argued,

the cost of producing commodities is higher.... The high rates of

wages in the United States are not peculiar to any branch of

industry, but are universal throughout its whole range. If,

therefore, a high rate of wages proves a high cost of production,

and a high cost of production proves a need of protection, it

follows that the farmers of Illinois and the cotton-planters of

the Southern States stand in as much need of fostering legislation

as the cotton-spinners of New England or the iron-masters of

Pennsylvania! A criterion which leads to such results must, I

think, be regarded as sufficiently condemned. The fallacy is, in

truth, ... that all industries are not in each country equally

favored or disfavored by nature, and have not, therefore, equal

need of this protecting care. If American protectionists are not

prepared to demand protective duties in favor of the Illinois

farmer against the competition of his English rival, they are

bound to admit either that a high cost of production is not

incompatible with effective competition, or else that a high rate

of wages does not prove a high cost of production; and if this is

not so in Illinois, then I wish to know why the case should be

different in Pennsylvania or in New England. If a high rate of

wages in the first of these States be consistent with a low cost

of production, why may not a high rate of wages in Pennsylvania be

consistent with a low cost of producing coal and iron?

“The rate of wages, whether measured in money or in the real

remuneration of the laborer, affords an approximate criterion of

the cost of production,(365) either of money, or of the

commodities that enter into the laborer’s real remuneration, _but

in a sense the inverse of that in which it is understood in the

argument under consideration_: in other words, a high rate of

wages indicates not a high but a low cost of production.(366) ...

Thus in the United States the rate of wages is high, whether

measured in gold or in the most important articles of the

laborer’s consumption—a fact which proves that the cost of

producing gold, as well as that of producing those other

commodities, is low in the United States.... I would ask

[objectors] to consider what are the true causes of the high

remuneration of American industry. It will surely be admitted

that, in the last resort, these resolve themselves into the one

great fact of its high productive power.... I must, therefore,

contend that the high scale of industrial remuneration in America,

instead of being evidence of a high cost of production in that

country, is distinctly evidence of a low cost of production—of a

low cost of production, that is to say, in the first place, of

gold, and, in the next, of the commodities which mainly constitute

the real wages of labor—a description which embraces at once the

most important raw materials of industry and the most important

articles of general consumption. As regards commodities not

included in this description, the criterion of wages stands in no

constant relation of any kind to their cost, and is, therefore,

simply irrelevant to the point at issue. And now we may see what

this claim for protection to American industry, _founded on the

high scale of American remuneration_, really comes to: it is a

demand for special legislative aid in consideration of the

possession of special industrial facilities—a complaint, in short,

against the exceptional bounty of nature.

“Perhaps I shall here be asked, How, if the case be so—if the high

rate of industrial remuneration in America be only evidence of a

low cost of production—the fact is to be explained, since fact it

undoubtedly is, that the people of the United States are unable to

compete in neutral markets, in the sale of certain important

wares, with England and other European countries?(367) No one will

say that the people of New England, New York, and Pennsylvania,

are deficient in any industrial qualities possessed by the workmen

of any country in the world. How happens it, then, that, enjoying

industrial advantages superior to other countries, they are yet

unable to hold their own against them in the general markets of

commerce? I shall endeavor to meet this objection fairly, and, in

the first place, let me state what my contention is with regard to

the cost of production in America. I do not contend that it is low

in the case of all commodities capable of being produced in the

country, but only in that of a large, very important, but still

limited group. With regard to commodities lying outside this

group, I hold that the rate of wages is simply no evidence as to

the cost of their production, one way or the other. But, secondly,

I beg the reader to consider what is meant by the alleged

‘inability’ of New England and Pennsylvania to compete, let us

say, with Manchester and Sheffield, in the manufacture of calico

and cutlery. What it means, and what it only can mean, is that

they are unable to do so _consistently with obtaining that rate of

remuneration on their industry which is current in the United

States_. If only American laborers and capitalists would be

content with the wages and profits current in Great Britain, there

is nothing that I know of to prevent them from holding their own

in any markets to which Manchester and Sheffield can send their

wares. And this brings us to the heart of the question. Over a

large portion of the great field of industry the people of the

United States enjoy, as compared with those of Europe, (1)

advantages of a very exceptional kind; over the rest (2) the

advantage is less decided, or (3) they stand on a par with

Europeans, or (4) possibly they are, in some instances, at a

disadvantage. Engaging in the branches of industry in which their

advantage over Europe is great, they reap industrial returns

proportionally great; and, so long as they confine themselves to

these occupations, they can compete in neutral markets against all

the world, and still secure the high rewards accruing from their

exceptionally rich resources. But the people of the Union decline

to confine themselves within these liberal bounds. They would

cover the whole domain of industrial activity, and think it hard

that they should not reap the same rich harvests from every part

of the field. They must descend into the arena with Sheffield and

Manchester, and yet secure the rewards of Chicago and St. Louis.

They must employ European conditions of production, and obtain

American results. What is this but to quarrel with the laws of

nature? These laws have assigned to an extensive range of

industries carried on in the United States a high scale of return,

far in excess of what Europe can command, to a few others a return

on a scale not exceeding the European proportion. American

enterprise would engage in all departments alike, and obtain upon

all the high rewards which nature has assigned only to some. Here

we find the real meaning of the ‘inability’ of Americans to

compete with the ‘pauper labor’ of Europe. They can not do so, and

at the same time secure the American rate of return on their work.

The inability no doubt exists, but it is one created, not by the

drawbacks, but by the exceptional advantages of their position. It

is as if a skilled artisan should complain that he could not

compete with the hedger and ditcher. Let him only be content with

the hedger and ditcher’s rate of pay, and there will be nothing to

prevent him from entering the lists even against this rival.”(368)

It is often said that wages are kept at a high rate in the United

States by the existence of protected industries. On the other

hand, the truth is that the protected industries must pay the

current high rate of wages fixed by the general productiveness of

all industries in the country. When the facts are investigated, it

is surprising how small a portion of the laborers of the United

States are employed in occupations which owe their existence to

the tariff. A general view of the relative numbers engaged in

different occupations may be seen by reference to Chart No. XXIV,

based on the returns for the census of 1880. The data are well

worth examination:(369)

(1.) Agriculture 7,670,493

(2.) Manufacturing, 3,837,112

mechanical, and mining

(3.) Trade and transportation 1,810,256

(4.) Professional and personal 4,074,238

services

All occupations 17,392,099

[Illustration: Chart XXIV.]

Chart XXIV. _Chart showing for the United States, in 1880, the

ratio between the total population over ten years of age and the

number of persons reported as engaged in each principal class of

gainful occupations. Compiled from the returns of the Tenth

Census, by the Editor._ NOTE.—The interior square represents the

proportion of the population which is accounted for as engaged in

gainful occupations. The unshaded space between the inner and

outer squares represents the proportion of the population not so

accounted for.

Of the second class, less than 450,000 work-people are engaged in

the chief protected industries—cotton, woolen, and iron and steel,

combined. This class, it is to be noted, in the census returns,

includes bakers, blacksmiths, brick-makers, builders, butchers,

cabinet-makers, carpenters, carriage-makers, and so on through the

whole list of similar occupations practically unaffected by the

tariff (so far as protection to them is concerned). So that, at

the most, there are less than a million laborers engaged in

industries directly dependent on the tariff, and the number is

undoubtedly very much less than a million. When some writers

assert, therefore, that the existence of customs-duties allows

industries (even including all those employed in producing cotton,

wool, iron, and steel) to employ less than a million laborers in

such a way that the remuneration is fixed for the remaining

16,000,000 laborers in the United States, keeping wages high for

16,000,000 by paying current wages for less than a million, the

extravagance and ignorance of the statement are at once apparent;

while, on the other hand, it is distinctly seen that the causes

fixing the generally high rates of wages for the 16,000,000 are

those governing the majority of occupations, and that the less

than one million must be paid the wages which can be obtained

elsewhere in the more productive industries. The facts thus

strikingly bear out the principles as stated above.

Confirmation—if confirmation now seems necessary—may be found in a

study(370) by our ablest statistician, Francis A. Walker, upon the

causes which have operated on the growth of American manufactures.

This growth has not been commensurate, he finds, with the

remarkable inventive and industrial capacity of our people, and

with the richness of our national resources: “I answer that the

cause of that comparative failure is found, primarily and

principally, in the extraordinary success of our agriculture, as

already intimated in what has been said of the investment of

capital. The enormous profits of cultivating a virgin soil without

the need of artificial fertilization; the advantages which a

sparse population derives from the privilege of selecting for

tillage only the choicest spots,(371) those most accessible, most

fertile, most easily brought under the plow; and the consequent

abundance of food and other necessaries enjoyed by the

agricultural class, have tended continually to disparage

mechanical industries, in the eyes alike of the capitalist,

looking to the most remunerative investment of his savings, and of

the laborer, seeking that avocation which should promise the most

liberal and constant support.

“It has been the competition of the farm with the shop which,

throughout the entire century of our national independence, has

most effectually hindered the growth of manufactures. A people who

are privileged to cultivate a reasonably fertile soil, under the

conditions indicated above, can secure for themselves subsistence

up to the highest limit of physical well-being. If that people

possess the added advantage of great skill in the use of tools,

and great adroitness in meeting the large and the little

exigencies of the occupation and cultivation of the soil, the

fruits of their labor will include not only everything which is

essential to health and comfort, but much that is of the nature of

luxury.”

It remains to be said in this connection that workmen are already

discerning the practical and real causes at work affecting their

wages—affecting them more directly than any tariff system possibly

could—by showing no small alarm at the immigration of foreigners,

such as the Hungarian miners and Italian laborers, who willingly

underbid them. In other words, they are beginning to realize, in a

practical way, the truth that increasing numbers are far more

potent than anything else in reducing wages. So long as

immigration is free to any race or nationality, there is no such

thing as “protection to home laborers”; the only protection to

them—not that I am urging the desirability of such measures—can

come solely from forces which limit the number of workmen who

enter into competition with them. Any other protection to

laboring-men than the prohibition of immigration—which no one

thinks of (except for the Chinese)—is an economic delusion.

Instead of “protecting” them to the extent of affording higher

wages, the tariff increases the cost of woolen clothing and other

articles of their consumption, in addition to forcing capital into

employments which yield a less return, and so insure lower wages.

§ 6. —on the ground of creating a diversity of industries.

It must be kept in mind that Political Economy deals only with the

phenomena of material wealth; it does not supply ethical or

political grounds of action. It is quite conceivable that a

legislator, in coming to a decision, may have to balance economic

gains against moral or political losses, and may choose to give up

the former to prevent the latter. But the economic truth remains

unchanged. Political economy, for instance, to the question, Is

there any gain in international trade? answers, unequivocally,

yes. Would it be a loss of wealth to the community to have the

goods formerly bought abroad now produced at home? The answer is,

certainly it would. But here it has been ably urged by intelligent

writers that a state has other ends to gain than the accumulation

of mere riches; that it must aim to secure the greatest moral,

social, and elevating influences possible for the working-classes;

and that while free exchange of goods may add to wealth, it may

injure the social and political well-being of a nation. So far as

these are social and political questions they do not belong to

Political Economy. But the commonest form of argument is that,

under free exchange, the United States would become purely an

“agricultural” country, its social horizon would become narrowed,

and a lower standard of industrial activity would then ensue;

instead of which, it is said, we should, by protection, keep in

existence diversified industries by which the national mind may be

better stimulated, and greater enterprise may be encouraged in all

branches of industry. This argument for “diversity of industries,”

however, is not merely a sociological question; it can only be

fully discussed from an economic stand-point, and deserves even

more than the brief attention we can give it here.

In the first place, as soon as any purely agricultural country

gains even a slight density of population—a density only such as

to warrant the introduction of the principle of division of

labor—there comes an inevitable differentiation of pursuits,

wholly outside of legislation, and through the operation of

natural causes. Not all of any population is required in

agriculture to provide the whole with food. By a division of

labor, one man in agriculture can produce the sustenance of

himself and many others. “The United States have at the present

time but five persons engaged in agriculture for each square mile

of settled area.” By the side of the farm must early spring up a

wide circle of industries—the shoemaker, the carpenter, the

blacksmith, the wagon-maker, the painter, the builder, the mason,

and all the ordinary employments which arise in any small

community from the earliest division of labor. Moreover,

“agriculture” is often used in a too limited sense as confined to

producing food alone (although even in that limited sense

employing nearly one half of the total number of our laborers). In

a new country the natural field of employment is found in the

“extractive industries,” which include the preparation for the

market not only of food, but also of all ores, coal, minerals,

oils, hides, leather, wool, lumber, and the industries intimately

connected with them; all the employments which transport these

from one part of the country to another (employing at present over

one ninth of all our laborers); and professional and personal

services of an extended variety. Even, therefore, if we were

obliged to forego manufactures entirely, the “extractive

industries” would necessarily involve a very extensive diversity

of employments.

The real question, however, for most persons, centers in the next

stage of the industrial evolution—that of the manufactures of

these above-mentioned products of the “extractive industries.” It

will be remembered, here, that a country does not possess an equal

ability in producing each of these or any commodities: the timber

formerly near great rivers may vanish into the interior; the

oil-sources may be more or less fertile; or the ore-deposits may

be more or less rich, more or less accessible, than those of other

countries. This being understood, then, as soon as the demand in

the country calls for an increased quantity of a particular

article, the cost may increase under the law of diminishing

returns until a foreign country—having inferior agents of

production as compared with our best—may be able to send supplies

into our markets. It all depends on whether the United States

wants more articles than can be produced on grades of natural

agents superior to those possessed by foreigners, taking cost of

carriage to this country into consideration. Even though foreign

competition appears when we reach poorer grades of natural agents,

it does not follow that some of the particular articles will not

be produced. What ought to be clear is, that untrammeled exchange

between countries will not prevent the existence of various

industries, but only limit production to those grades of agents

which are its best. This may be better seen by a simple diagram:

Iron and Coal: England 7 6 5 4 3 2 1

Iron and Coal: United States 4 3 2 1

Wheat: England 4 3 2 1

Wheat: United States 7 6 5 4 3 2 1

England may have seven different grades of productiveness in her

iron and coal supplies, of which her grades 1, 2, and 3 are

superior to the best grade of the United States, while grades 1,

2, 3, and 4 in the United States may compare only with grades 4,

5, 6, 7 of England. So long as England can supply herself and the

United States also with coal and iron from the three superior

grades, the United States can not work grade 1 at home. But if the

supply for England and the world requires grade 5 to be worked,

then the United States can begin the industry on her best grade,

although that is far inferior to the best grade in England.

Likewise, if the United States has three grades of wheat-land

superior to England’s best grade, the ability of England to grow

wheat depends on whether the United States can, or can not, supply

both herself and England from grades 1, 2, and 3. If we must

resort to grade 4, then England can begin to grow wheat as well as

we. In short, under a system of free exchange, as great a

diversity as under protection is probably possible, but only in

such a way that the best possible advantages in each particular

industry are employed. Smaller amounts in some branches, and

greater amounts in others, may be produced under a free than under

a restrictive system, but with all the greater gain which arises

from a proper and healthy adjustment of trade. The most poorly

endowed enterprises in each occupation would be given up, but not

the whole industry itself. No class of persons feel the

competition of rivals more than English farmers since American

wheat has come into English markets, and yet it does not follow

that England can not grow a bushel of wheat. The fact is, merely,

that some kinds of lands were thrown out of cultivation, and a

readjustment made, to the benefit of those wanting cheaper food.

So with us: we should not, by the free exchange, be forced to give

up the iron and coal industries entirely; for the best mines would

still keep that occupation in existence to “diversify” the others.

So far the explanation covers the “extractive industries” only, or

those industries affected by the law of diminishing returns when a

larger quantity is demanded. The real question arises as to the

manufactures of these materials. But we count upon larger

industrial rewards, in the form of wages, and profits, here than

in England; we must get more from an industry than England in

order to satisfy us. Our grades of occupations, therefore, must be

more productive to a certain extent, grade for grade, than English

grades, in order to allow of their remaining free from

competition. But we have this superiority, as regards our home

market, owing to natural causes: (1) cheap raw materials (if we

except wool and other commodities whose price is raised by the

tariff); (2) advantage over England in cost of transportation of

raw products; and (3) in the cost of transportation, again, of the

finished goods in reaching our markets. Now, the processes of

manufacture which do not put much labor upon the materials,

especially where the articles are bulky, are conducted in this

country without fear of foreign competition. And the range of this

class of manufactures is surprisingly large. It includes the

manufactures of iron, such as stoves, and the common utensils of

every-day life; of hides, such as leather, harnesses, etc.; and of

wood, such as all the furniture of common use. The list is too

long to be fully stated here. These industries are not kept in

existence by the tariff; and a diversity as wide as this would

arise under a system of free exchange, as well as of restriction.

Indeed, if duties were removed from so-called “raw materials,” it

is altogether probable that a wider diversity would exist than

ever before.

And yet, it will be said, there are some things we can not produce

in free competition with England. Of course there are; and it is

to be hoped it will long continue so. If there are not some kinds

of commodities which foreigners can produce to better advantage

than we, then there will be no possibility of any foreign trade

whatever; since, if they can send us nothing, they can take

nothing from us. To deny this position, is to say that the export

and import trade of the United States (amounting in 1883 to more

than $1,500,000,000) is of no profit, and had best be entirely

destroyed, in order that a few industries in which we have no

natural advantages (and which employ less than one seventeenth of

the laborers in the United States) should be continued at a loss

to the general productiveness of our labor and capital, and so to

a general diminution of wages and profits.

§ 7. —on the ground that it lowers prices.

The argument—heard less frequently now than formerly—has been

advanced, drawn inductively from statistics, that protection does

not raise prices; because, after duties are put on, a larger

quantity is produced, the advantages of large production are

reaped, and then the price of the manufactured commodity falls

lower here than it was before the duty was imposed. The position

is then held that protection does not raise prices. It is, of

course, understood to mean the prices of protected commodities—a

necessary precaution, because we find our own agricultural

(unprotected) commodities cited to show that prices are lower here

than in England.

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What we have said of duties on importation generally is equally applicable