FOREIGN TRADE.
Wonderful is the continuity in the growth of any great Science, and
equally so the persistency of any radical error that once gets fairly
imbedded within it. As we saw fully in the last chapter Money is
nothing in the world but a convenient, intermediate, equivalent, and
easily measurable merchandise; but almost as soon as men began to
analyze Sales and to generalize from their data, a notion nestled way
down in their work, that Sales against Money were somehow or other
different from Sales against other merchandise; and thence sprang up,
particularly among the Romans, what we have called the Bullion Theory.
The broad and the true view was held indeed from the beginning, and
was maintained even among the Romans, as we learn from an interesting
passage in the Roman Law,--"_Sabinus and Cassius think Value can dwell
in another thing than money too, whence is that which was commonly
said, Buying and Selling is carried on in the exchange of goods, and
that view of purchase and sale is very old; but the opinion of
Procullus has deservedly prevailed, who says, Exchange is a particular
kind of transaction different from Selling._"
Science has indeed sloughed off this old and vital error, and most of
its sequels; but Public Opinion in many countries is full of it still;
and Legislation, in our own country at least, is all the time trying
or threatening to transmute merchandise (say silver) into money, as
if that could raise its value or change its nature.
It was but a single step from the Bullion Theory to the Mercantile
System. If money be somehow different from and better than
merchandise, then each nation should strive to handle its foreign
trade so as to get back from other nations more money than it renders
to them in exchange: in other words, each nation must try to sell to
the rest more goods than it takes goods back in pay, so as to have a
"_balance_" come in of gold and silver. How natural the transition
from Bullionism to Mercantileism! And it was a step of genuine
progress too. Goods are good, and there is profit in their exchange;
but gold is somehow better than goods, and we must manage somehow to
get a "balance" in that! If this position had only been sound, and one
nation only been in possession of the precious secret, how nicely it
might have worked for that nation! But all the leading Nations of
Europe made the transition from Bullionism to Mercantileism at one and
the same time, and they vexed and impoverished each other for three
half-centuries, and went to war with each other besides, under the
double illusion, (1) that gold could be practically gotten in that
way, and (2) that if gotten it were one whit better than the goods for
which it would have been at once spent.
Economics as a Science is now free from every taint of Mercantileism
also, but it lingers on more or less in half-informed minds, and in
the less-experienced nations; and the system itself merged itself
three half-centuries ago into another, which is not another, namely,
into Protectionism. If nation A must sell more goods to nation B than
it takes back in goods, so as to get the coveted "balance" in gold
from B, would it not help that cause along to put obstacles in the way
of restrictions or prohibitions against the introduction of goods
from B to A? Less goods, more gold, argues A. A forgets that the same
mental processes are going forward in B's mind towards the same
conclusion in relation to A. Now, cogitates A, what kind of goods from
B had we better restrict or prohibit? A, by the way, consists of some
millions of individuals, some of whom are always on the watch to get
their axes ground at the government grindstone. What kind of goods
shall we prohibit from B? Why, of course, those kinds which we are now
making or growing. We can supply these for ourselves. It does not
escape the notice of these makers and growers, that the restriction or
prohibition of similar goods from B will raise the price at home of
their own goods. Scarce is ever costly. On go the restrictions,
ostensibly at first in behalf of an imaginary "balance" in gold, which
fragile reason soon passes out of mind in the presence of a very real
reason for such restrictions, namely, artificial high prices for
certain domestic goods, paid indeed by the entire home community to
the comparatively few makers or growers of the goods now "protected,"
as the current phrase is. Mercantileism has passed over into
protectionism. The feeble friends of a "balance" have now become the
strong friends of a "monopoly." Personal greed to grow rich at the
expense of one's own countrymen thus becomes the single or combined
force that puts on and keeps on and piles up the so-called
"protective" restrictions and prohibitions.
Scientifically Protectionism is as dead as Mercantileism and
Bullionism. There is not an Economist in Christendom, of any
international or even national reputation, who now undertakes fairly
and squarely by means of analysis and induction, to propound or defend
a scheme so contrary to common sense and common honesty as this is,
and which, universally applied, would annihilate the commerce of the
world. But many of the nations are still tinctured more or less by the
old subtlety, and powerful classes within them and specially within
the United States, classes grown rich and powerful by what is nothing
else than public plunder, are strenuous and successful advocates, not
in open discussion and fair debate but by clandestine and corrupting
methods and combinations, to maintain in the light of the nineteenth
century an outworn and decrepit "something" worthy only of the dark
ages. The old and foolish cry for a "balance of trade" is merged now
in the United States into the insane and hateful clamor for the
destruction of public trade in the behalf of private gain.
This is the sole reason why we must now undertake a careful chapter on
Foreign Trade. There is no reason in the nature of things, or in the
nature of trade, why Foreign Commerce should be treated of separately
from Domestic Commerce. The two are precisely alike in all their
principles and in all their results. In one as in the other, in every
case and everywhere, there are (1) two persons, each of whom has a
Service in his hands to sell against a Service in the hands of the
other; (2) two reciprocal estimates, by which each owner concludes
that he prefers the Service of the other to his own; (3) two mutual
renderings, by which each Service comes into the possession, present
or prospective, of the new owner; and (4) two personal satisfactions
as the result of all, constituting the ultimate motive and the sole
reward of Buying and Selling.
There are two possible differences in certain cases between Domestic
and Foreign trade, both superficial and but barely worth the mention
here. Foreign countries engaged in trade _may_ be more remote from
each other than places exchanging products within the same country.
The distances, however, between Bangor selling ice to New Orleans for
sugar, and Boston selling boots and shoes to San Francisco for fruits
and wine, are much greater than those between Liverpool and St.
Petersburg, or those between Stockholm and Palermo; so that, it may be
said in general, that the trade between all the European countries
confronts less distances, and presumably less costs of transportation,
than the trade within the United States. And another thing is to be
said in this connection: Foreign trade as a general rule is conducted
by water-routes, and domestic trade under the same rule is carried on
by land-routes; and, therefore, the costs of transportation by the
latter are much more expensive.
The other possible difference is more considerable, and considerably
more in favor of Foreign as compared with Domestic trade. We have
learned perfectly already, and the point is fundamental, that all
trade proceeds on the sole basis of a relative Diversity of Advantage
as between the two parties exchanging. This relative superiority of
each exchanger over the other at different points depends in domestic
trade partly upon divergent natural gifts to individuals, partly upon
their concentration of mind or muscle or both on a single class of
efforts each, and partly upon the use and familiarity in the use of
the gratuitous helps of Nature aiding that class of efforts. But in
foreign trade there are commonly some additional grounds of Diversity,
since the various countries of the earth have received from the hands
of God a diversity of original gifts, in climate, soil, natural
productions, position, and opportunity. And besides these original
international differences, there has been developed of course in the
history of the inhabitants of these countries a diversity of tastes,
aptitudes, habits, strength, intelligence, and skill to avail
themselves of the forces of Nature around them. International trade,
accordingly, is somewhat more broadly and firmly based than the home
trade can be, inasmuch as these international differences are apt to
be more inherent and less flexible than domestic differences between
individuals; it is on these diversities, original, traditional and
acquired, that international commerce hangs; it could never have come
into existence without them; and it would cease instantly and
completely were they to fade out. Men engage in foreign trade,--not
for the pleasure of it,--but for the sake of the mutual gain derivable
to both parties; they desist from it so soon as that mutual gain
disappears; and there is no gain in any series of exchanges, unless
each party has a superior power in producing that which is rendered,
compared with his power in producing that which is received.
With these few preliminaries, we pass now, in the first place, to
unfold in order the COMMON AND UNIVERSAL PRINCIPLES OF FOREIGN TRADE.
For the sake of illustrating these, we will now take a simple supposed
case, a trade between England and France in cottons and silks, and
follow it through clearly to the end.
1. When will it be mutually profitable for England, that is, for
certain English merchants, to send cottons to France to buy silks
with, and for France, that is, for certain French traders, to send
silks to England to buy cottons with? Money and all other commodities
except these two, silks and cottons, are wholly out of the question
now and should be wholly out of our minds the while, though for
simplicity's sake we shall use the _denominations_ of money for
comparing the respective efforts, translating pounds and francs into
dollars. The answer is easy: the trade will be mutually profitable,
when efforts bestowed in France upon silks will procure through
exchange with England more of cottons than the same amount of efforts
bestowed in France upon cottons will produce of cottons directly;
_and_ then, when efforts bestowed upon cottons in England will
procure more of silks through exchange with France than the same
amount of efforts bestowed in England upon silks will produce of silks
directly. It is not a question of the absolute cost of either
commodity to the parties producing it, or of a comparison of those
absolute costs at all, but a question of the relative cost of that
produced in either country compared with what would be the cost of the
other commodity were it to be produced in that country. So long as
there is a difference of relative efficiency in the production of the
two commodities in the two countries, so long, setting aside the costs
of carriage, may there be a profitable exchange of the two. A demand
in each country for the product of the other is of course presupposed
in the illustration.
Suppose now, that Efforts in England on certain cottons be gauged at
$100, and that Efforts in France on certain silks be gauged at $80,
and that these finished commodities then exchange even-handed against
each other: is that a losing trade for England and a gainful trade for
France? That is more than we can tell yet. That depends upon the
further decisive question, whether the Efforts gauged at $100 if
expended in England in the manufacture of silks will procure as many
and as good silks as the same obtain in exchange with France; and
whether the Efforts gauged at $80 if expended in France on cottons
directly will secure as many of them as if expended on silks directly
and then traded off for cottons. In effect the Frenchmen ask, Can we
get more and better cottons by working on silks and then trading them
off for English cottons than we can get by equivalent Efforts in
working on cottons at home? Likewise the Englishmen ask, Can we get
more and better silks by working on cottons at home and then trading
with France for silks than we can get by trying to make silks
directly? France by climate and soil and habitudes is better adapted
to silks than cottons: England by virtue of the same is better adapted
to cottons than silks.
2. How does the Diversity of relative Advantage practically work in
foreign trade? Let us suppose that while the cottons cost $100 in
England, it would cost $120 to manufacture there as good silks as can
be made in France for $80; and that while the silks cost but $80 in
France, it would cost $96 to make cottons there as good as the English
can make for $100. On this supposition France can make both the silks
and the cottons at a cheaper absolute cost than England can. What of
it? Does that destroy the motive and the gain of an exchange between
the countries in these two articles? Let us see. By an exchange with
England, France gets for $80 in silks, cottons which would otherwise
cost her $96, which is a handsome gain of 20%; while England gets for
cottons costing her $100 silks which would otherwise have cost her
$120, which is another handsome gain of 20%. Although France can make
each commodity for less absolute money than England can make either of
them, there is a Diversity of relative Advantage; and, therefore,
there might be in this case, as there is actually in many such cases,
a very profitable trade. The efficiency of France in making silks
relatively to the efficiency of England in making silks is in the
ratio of 80 to 120, namely, a difference of 50%; while the aptitudes
of France in making cottons relatively to that of England in making
the same is only in the ratio of 96 to 100, namely, a difference of
4-1/6%. So long as England offers in cottons a good market for French
silks, how utter the folly and large the loss of France in going to
work to make cottons!
In the majority of cases, doubtless, foreign trade takes place in
articles, in the production of one of which each of the respective
countries has an absolute advantage over the other; but an every way
advantageous trade may be carried on in commodities, in the production
of _both_ of which one nation shall have an absolute superiority over
the other, provided only that this superiority be _relatively diverse_
in the two commodities, as has just been shown. This is an effectual
answer to the ignorant clamor of some, we take it, who make objection
to importing articles which might be made at home for the same sum of
money as foreigners expend in making them; admitted, that they might
be so made, does it follow that the country importing them would get
them as cheaply by making them itself? _By no means does that follow._
Let no nation, then, be in haste to drop a trade, because it thinks it
can make the goods received in exchange as cheaply as the other nation
makes them, so long as it has an advantage absolute or relative over
the other in making the goods rendered in exchange; and when that
advantage ceases, it may be sure, that the trade will drop of itself;
because it always takes _motives_ to make the mare go.
3. What are the extreme limits of the Value of cottons and silks in
the case supposed, and when will a third nation be able to undersell
either in the ports of the other? This is the answer: the extreme
value of French silks in English cottons will be 80 and 96; they
cannot fall below 80 because they cost the French that to manufacture
them; they cannot rise above 96, because at that rate the French can
make cottons, and there would be no motive, that is, no _gain_, in
their exchanging for cottons. Nations, that is to say, individuals,
will never get themselves served at a greater effort than that at
which they can serve themselves. If a given effort does not realize
more through exchange than it would do directly, then that exchange
ceases of necessity, as fire goes out for lack of fuel. The extreme
limits of the value of English cottons in French silks will be 100
(lowest) and 120 (highest) for reasons precisely similar in the case
of the English. Therefore, the highest profits possible to both
nations under the conditions of the trade are 20% each. France would
be glad to take the cottons at a return of 80 in silks, at which rate
her gain would be 20%, and she cannot under any circumstances offer
quite 96, at which rate her gain would disappear.
No third nation, accordingly, in a trade of silks for cottons can
expel the French from the English ports, until it is prepared to offer
nearly 96 (or more) in silks in return for English cottons; that is to
say, until its efficiency in making silks relatively to that of
England in making them presents a greater difference than the
difference of efficiency between France and England in making silks,
which is a difference of 50%. England would be glad to take the silks
from France at a return of 100 in cottons, at which rate her gain also
is 20%, and she cannot possibly offer quite 120 in cottons, because at
that rate her gain would wholly vanish. England could be undersold in
the French ports, when somebody is ready to offer nearly 120 (or more)
in cottons against the French silks, whose _quantum_ in the exchange
may vary from 80 towards 96. Here is the whole doctrine of one nation
underselling another in the ports of a third nation. Silks stand here
for sample of all French commodities of whatever name and cottons for
all English goods whatsoever; and England and France stand in the
illustration for any and all nationalities. Any nation obtains any
share or a greater share in the commerce of the world solely in virtue
of a greater relative efficiency in producing _something_ valuable, as
compared with some other nation's power in producing something _else_
that is valuable.
4. How does the varying play of International Demand affect the value
of articles in foreign trade? The answer is clear and easy: if the
demand for French silks in England just answers to the demand for
English cottons in France, so that the silks offered by France just
pay for the cottons offered by England, then, cost of carriage aside,
the gains of the trade will be equally divided between the two sets of
merchants, and each will realize 20% profits, because neither will
have any motive to lower the value of its commodity below its highest
value. The Frenchmen from their point of view will offer 80 in silks
and take 96 in cottons: the Englishmen from their standpoint will
offer 100 in cottons and get 120 in silks. Demand and Supply are
equalized at a point of value most favorable to both parties, and one
really determined by the relative cost of production.
This case of equalization, though possible, is likely rarely to occur
in practice. On any terms of exchange first offered, there is likely
to be a stronger demand in one country for the product of the other
than in this country for the product of that. This will of course lead
to a change of Value, and a new division of Profits. The product for
which the demand is less will find its market sluggish, and in order
to tempt further and brisker exchanges will be compelled to offer more
favorable conditions. He who enters a market in quest of what is
_more_ in demand with a service which is _less_ in demand, will have
to lower his terms, or not trade. The equalization of Supply and
Demand will only be reached in this case, by quickening the demand for
the commodity now less in demand through an offer of better terms in
trade. Thus, if the demand for French silks in the English ports be
slack, in comparison with the demand for English cottons in France, at
the rate of exchange first established, say, 80 for 96, the French
merchant has no resource, if he wishes to continue the trade, but to
agree to give more silks, for the same amount of cottons, say, 85 for
96. If this actual reduction prove sufficient to cancel the account
in cottons with the account in silks, then the trade will proceed on
this new basis for a while, because the equalization of demand and
supply has been reached through a new valuation of the two
commodities, and there is now consequently a new division of the
profits. France gains less than 13% by her trade with England, while
England gains 27% in her trade with France.
Under these new terms of exchange, it is quite possible that silks may
again become heavy in reference to cottons, and a new decline take
place in their relative value. If the French are obliged in
consequence to offer 90 for 96, in order to obtain the cottons they
want, their own profits will sink to 6%, while the same causes will
lift the English profits to 35%. If, in any contingency, the French
were driven by the state of the market to concede something near to 96
in silks for 96 in cottons, the trade would cease in that case, just
as every transaction ceases when the motive for it ceases. We must
remember of course, that the cottons of England are just as likely to
become slack in reference to silks, as the silks are relative to the
cottons; and when this happens, the English dealers will have to lower
their terms, and thus surrender a larger share of the profits to the
French. By this ceaseless play of Supply and Demand, within the
outermost limits drawn by the relative Cost of Production at the time,
is the Value of commodities determined in Foreign Trade; and no degree
of complication in the variety of articles, or in circuitous
exchanges, affects, for substance, these fundamental principles.
5. What are the causes deciding the exportable articles of any nation,
and their order of precedence in Export? Watch a little at this point,
and the true answer will loom up steady and certain. If, instead of
one article, say cottons, England sends two or ten kinds of goods to
France in payment for silks or wines or whatnot, she will of course
send in preference that commodity in which her own commercial efforts
are relatively most efficient, so long as the French demand will
receive it, because her own profits will be the greatest on that;
then, when obliged to lower terms on that down to the point of
relative advantage at which her next available article stands, she
will send that next in quantities regulated by the demand for that;
and so on down to the end of the list of possible exportables to
France. France is guided as to her exportables to England by precisely
the same principles and prospects of profit. So of all commercial
nations whatsoever. No matter whether the articles be one or many; no
matter whether the trade be a direct or indirect trade; the profits in
international commerce depend in all cases, first, upon the ratio of
the cost of what is rendered to what would otherwise be the cost of
what is received, secondly, upon the relative intensity of the two
Demands.
It follows logically and necessarily from all this, that what a nation
purchases by its exports, it purchases by its own most efficient
Production, and consequently at the cheapest possible rate to itself,
and at the highest possible profit to its merchants. Under a decent
freedom of international choice and action, of sale and delivery, only
_those things_ are ever exported, for the procuring of which a nation
possesses decided advantages relatively to other nations, and
relatively to its own advantages in producing directly what is
received in return; and hence, the return cargoes, no matter what they
have cost their original producers, are purchased by this nation as
cheaply as if they had been produced by its own most advantageously
expended Effort. This is a wholly impregnable position; and the
advocates of restricting and prohibiting Foreign Trade are challenged
to try their hand a little or a good deal (as best suits them) at its
bristling defences.
It follows also from the discussion under this head, what shallow
thinkers are they, who deem it needful that each nation should be able
"_to compete_" with other nations in every branch of production. Why
are they not consistent enough to apply their favorite catchword,
"_compete_," to domestic exchanges also, and require that the
clergyman shall have artificial and governmental facilities for
"_competing_" with the lawyer, the tailor with the blacksmith, the
farmer with the manufacturer, the publisher with the author? Will
folks never learn that _all_ Exchanges, domestic as well as foreign,
hang on relative superiority at different points, and that any Nation
trying to make its success in production equal at all points would be
just as stupid as an artisan trying to learn and practice all the
trades at once? Suppose the said nation to succeed, what then? It
would supply its wants at a certain low average efficiency of effort;
whereas, by a thorough development of all its own peculiar resources,
it could command by exchange the products of the whole world at a cost
not exceeding that of its own most productive and efficient Exertion.
The precious metals, whether produced at home or obtained from other
nations by another series of exchanges, whether coined or in the form
of bullion, stand here in the same relations as other commodities, and
are frequently the most profitable articles that a nation can export.
In one word, whatever justifies individuals in selecting diverse paths
of production according to their capacities and opportunity, the same
(and even more) justifies the Nations in fully drawing out their own
best capabilities under the conditions in which God has placed them;
and then, exchanging what costs them little for what would otherwise
cost them much, in enjoying all that the world offers at the least
possible expenditure of irksome effort. Such wise and wide action
promotes the common good of all the nations, and makes the best of all
accessible to all, and arms each with the power of all; while the
narrow and senseless policy of drawing into one's own shell after
putting up barricades against one's neighbors, by lessening everywhere
the Diversities of relative Advantage, so far forth incapacitates all
for profitable and progressive Exchanges.
6. How do new improvements in machinery and other enhanced facilities
of Production in one country affect its foreign trade? A cheering
response will be drawn out, if we now apply this question to the
conditions of our old trade in silks and cottons. Suppose France by
new methods of silk culture to become able to make the silk which
before cost $80 for $50, cottons in France and silk and cottons in
England remaining in natural cost as before, does France alone gain
the entire advantage of the increased cheapness of silk? Wait a
minute, and we will see. The production of silk in France is greatly
quickened by the cheaper methods, more is produced, more is carried to
England to buy cottons with, but at the old rate of 80 for 96, the
English will not take any more silks, and the French who can now
abundantly afford it, since their nominal 80 is really 50, will offer
more silks for 96 in cottons, in order to tempt a brisker and broader
sale. They offer, say, 96 in silks for 96 in cottons, and if that
reduction of Value of silks in cottons be enough for the equalization
of the respective Demands, the trade will proceed on that basis, at
least for a time; and as there is now a larger difference of relative
advantage than before, there will be, as always in such cases, larger
profits to be divided between the two parties. The 96 now in silks to
the English is really only 60 in cost to the French, so that the
French gain in the trade is largely increased; because they now get
for what costs them 60 what would otherwise cost them 96, a clear gain
of 60%. Before the new methods of silk culture were introduced they
could gain but 20% at the utmost.
But the English have also reaped largely from the ingenuity and
diligence of their neighbors. Before, they gained only 20% in the
exchange at best; but now they get for what cost them $100 that which
would otherwise cost them $144, a handsome profit of 44%. Indeed, it
might easily happen, through the incessant changes in International
Demand, that even a larger share of the benefit of the French
improvements should accrue to the English than to the French
themselves; the share of the French all the while being large, and
much larger, than if, greedily endeavoring to keep all the benefit,
they should refuse to trade at all. Thus we reach again from another
outlook, a grand and universal doctrine of Exchange, _that each party
is benefited by the progress and prosperity of the other_. Indeed, the
only possible way in which all nations can share in the thrift and
enterprise and improvements of each other, is through mutual
international exchanges; and when each nation sees to it that it have
a few commodities at least for which there is a strong demand among
foreigners, and in the production of which themselves have a strong
superiority, it may rest assured that it buys all it buys from abroad,
gold included, at the cheapest rate to itself, and shares a part of
the prosperity of every nation with which it trades.
7. Which party in foreign trade pays the Costs of Carriage, or do each
pay them in equal proportion? It is plain, that the aggregate cost of
transportation to the foreign markets is just so much added to the
Cost of Production, and is a deduction of so much from what would
otherwise be the whole gain of the Commerce; but it is plainly not
true, that each party necessarily pays the whole of his own freights;
and, therefore, that the party carrying bulky articles is at a
disadvantage compared with the other. He may or may not be at a
disadvantage on that account. That will depend on the effect of the
new expense for freight, however divided, on the Demand in each
country for the product of the other. We will suppose, that in the
outset England pays the whole cost of carrying cottons to France, and
France the whole cost of sending silks to England; but as cottons are
many times more bulky than silks proportionably to value, a larger
bill of freights would fall of course to England; and cottons would
therefore fall in value relatively to silks; but cottons and silks
have both risen absolutely, that is, with reference to any given
effort, or with reference to a money standard.
Suppose now that France, instead of 80 for 96, has to render 82 for
96; and England, instead of 100 for 120, now has to give 105 for 120.
The French gain in the trade is reduced from 20 to nearly 17%, and the
English gain from 20 to nearly 14%; but it is by no means certain,
that the commerce would go on precisely on these terms; the enhanced
value of silks might well deaden the demand for them in England, more
than the relatively less enhanced value of cottons in France would
affect the demand for them. Silks have risen in England 5%, but
cottons have risen in France only 2-1/2%; it is therefore very likely
that thereafter the demand for cottons will be stronger than the
demand for silks, and if so, the French will have to offer better
terms, or, what is the same thing, to be obliged to pay a part of the
English freights; so that there is nothing in the true state of the
case to justify the conclusion jumped at by some people, that they
who carry heavy goods are at a disadvantage compared with those who
carry light goods. That will depend wholly upon the Equation of
International Demand as between the two kinds of goods. Nothing in the
nature of things hinders, that each party shall in effect pay the
freights of the other, or one even really pay the freights of both.
8. Lastly, what is the effect upon international commerce of the
constant play of the Par of Foreign Exchange. This is a point of great
importance, that has been but little discussed in this connection,
because it has not been popularly understood or scarcely even
popularly explained. In the light of the full unfolding of "Credits"
in our Fourth Chapter, and in the light of these simple principles now
under discussion, there will be no great difficulty to any intelligent
reader in fully understanding this matter of Foreign Exchange,--a
matter never before so vital to the commercial interests of the United
States as now. For the sake of general illustration we will take the
"Exchange" as between the United States and Great Britain, since the
same fundamental principles apply as between all commercial countries.
When merchants export goods, say from New York to London, or _vice
versa_, they do not wait for their pay till the goods be actually
marketed abroad, but draw at once Bills of Exchange to the amount of
the home value of the goods on the parties to whom the goods are sent,
and then put these bills on present sale with brokers or middlemen at
home. There thus becomes a market or prices current in New York for
commercial bills drawn on London, and similarly a market in London for
bills drawn on New York. The New York exporter, accordingly, is not
certain of getting in money the full face of his bill _minus_ interest
for the time it has to run, because a great many such exporters may
have thrown their similar bills upon the market the same day, which
always tends so far forth to depress the price of the bills in
accordance with an universal law of Economics. Scarce is ever costly:
plenty is ever cheap.
Who buys these bills when exposed for sale in New York? Who wants
them? Clearly, only those who have commercial debts to pay in London.
A bill of exchange drawn in New York on London is nothing but a debt
due from somebody in London to anybody whom the drawer in New York
chooses to make the payee. The debtor lives in London, and it is every
way cheap and convenient for all parties, that he settle his debt with
a creditor living in London. So it happens, that parties in London who
have sold goods in New York and drawn bills on them for present
payment, expose those bills for sale in London to the parties who have
debts to pay in New York. If now, London or those whom London
represents in these transactions, have sold but few goods to New York
or to those whose business is settled in New York relatively to the
amounts sold by New York to London, then London bills will be
relatively scarce as compared with the New York bills drawn on London.
In other words, New York has more debts to pay in London than London
has in New York, and, consequently, the parties in London who want
bills to pay New York debts with, have to buy them in a relatively
scarce market. They have to _bid_ for them, as it were. The effect of
this is always to carry up the price of that, for which the buyers are
many and the sellers relatively few. So, under perfectly natural
causes, London bills on New York come to a premium; that is to say,
the London sellers get more than the face of their bills drawn, and
the trade with New York becomes _extra_ profitable to them.
Suppose London bills of Exchange on New York are selling for 101,
thus giving 1% extra profit to English exporters; for precisely the
same reasons that they are so selling, New York bills on London are
selling in New York for 99, thus subtracting 1% from what would
otherwise be the gains of the New York exporters to England under the
common principles of Foreign Trade. It is evident, therefore, that the
causes of the course of the international Par of Exchange are an
essential part of the principles of foreign Commerce; and whatever
tends to derange or upset the natural course of the Par, as a constant
or constantly recurring cause, must receive careful attention in a
book like the present. We have begun at the very beginning of this
matter, and we are now going to follow it up to the very end.
The Diversity of relative advantage in the Production of the two
commodities exchanged, is the first and chief ground of mutual Profit
in foreign trade; the varying Intensity of relative Desire on the part
of each exchanger for the product of the other, is the second and
secondary ground on which foreign trade must go on; and the third and
final difference as between the two parties, which goes to make or mar
the profit of each of them in the trade, is the current Price of the
Bill of Exchange drawn by each creditor on his debtor abroad. It is
plain that these three things must always be taken into account
simultaneously by prudent exporters and importers, in order to
estimate the prospect of a profitable trade then and there; and it is
plain also, that one or even two of these three differences of
relative advantage might fade out for a time, and a profitable trade
still proceed, provided the other two or one of these differences were
sufficiently pronounced. For example, to take an extreme case, silks
from France might still go to England for cottons to the advantage of
both countries for a time, though "exchange" were exactly at "par"
between them and the "demand" for silks were precisely met by the
"demand" for cottons, on the strength of a marked and persistent
diversity in relative cost of production of the two textiles.
Here is another of the trinities of Political Economy. Here is
complication indeed, but a complication regulated and beautified by
inflexible laws of Nature and the scarcely less inflexible laws of
human Motives.
So far the argument has proceeded on the supposition of a common
standard of Value, say gold, between England and France, London and
New York, and by implication all other commercial countries. Commerce
rejoices in, and progresses by, a common measure of Values. By an
experience of 2000 years the world has proven gold to be the best
international Measure. From a simple comparison of the weights of pure
metal in the standard coins of the nations is established a fixed
monetary "par" as between them. Thus the dollar of the United States
contains 23.22 grains of pure gold, and the English pound sterling
contains 113.001 grains of the same; consequently, there are $4.8665
to the £ sterling, and this is and has been since 1834 the monetary
"par" between the United States and Great Britain. Similarly, the par
between France and the United States is $1 to 5 fr. 18 centimes, since
the franc is 19.29 cents gold for gold. The monetary par, accordingly,
as between any two nations using the gold standard, is a matter easily
ascertained and kept in mind; while the constantly variable prices
current of Bills of Exchange are reckoned in and from this monetary
par. Thus, if a commercial bill drawn in New York on London sells for
$4.8665 _minus_ current interest for the time it has to run, English
"exchange" with us is said to be at "par"; if it sell for more than
that, exchange is technically said to be "_against_" us, although the
excess in price is just so much additional profit to the American
exporter; and if it sell for less than that, exchange is said to be in
our "_favor_," although the difference is just so much subtracted from
the gains of the American exporter.
The close of the second week in July, 1890, found in New York
"Sterling exchange dull but firm, with actual business at $4.84-3/4
for 60-day bills and $4.89 for demand bills: the posted rates were
$4.85-1/2 and $4.89-1/2 respectively." Exchange, accordingly, had
turned "against" the United States, that is to say, American exporters
could get a little more for their bills on London than the monetary
par. Under such circumstances it may be cheaper to send the gold to
liquidate a British debt than to buy bills and send _them_. Just this
happened last week: $2,000,000 in gold went (mainly under this
impulse) from New York to London. There is a limit, therefore, to any
further rise in the price of "exchange," when it reaches in an upward
direction the then present cost of sending gold to foreign creditors.
The limit in the downward direction to the price of exchange is the
last margin of profit to the exporter as such. Thus, when the New York
exporter can only get, say, $4.83 for his sight bill of exchange on
London, his loss in the trade so far forth is 1%; and it may be
doubtful, whether his possible gains at the other two points, namely,
relative cost of production and relative intensity of demand, will
overbalance this certain loss and leave a sufficient margin of profit.
This chance of profit or loss from casual turns in the commercial
"exchanges" is a very small matter in foreign trade in comparison with
the other two grounds of possible profit or loss. The main thing for
every commercial nation to see to is, that it have at least a few (the
more the better) commodities in general use throughout the world, _in
the cost of the production of which it has a relative advantage over
all competitors, and the demand for which by foreigners is relatively
intense and constant_. And it will never come amiss for any nation
with these two crucial advantages to keep a sharp watch over a class
of its own citizens, lest they, shrewdly and greedily, for special
reasons of their own, get laws passed the result of which can only be
_to increase the costs of production of these few exportables, and at
the same time lessen the foreign demand for them_. ETERNAL VIGILANCE
IS THE PRICE OF LIBERTY OF COMMERCE.
As a general rule for the last half century commercial "exchanges"
have been "against" Great Britain, that is, her exporters have been
able to get more than "par" for goods sent abroad in the price of the
bills drawn on them, and her commerce has been _profitable_ to her so
far as this cause is concerned; which during the same interval of time
the "exchanges" have been "in favor" of the United States, that is,
her exporters have been obliged to sell their bills drawn for less
than "par," and her commerce so far forth has been _unprofitable_ to
her. We may only briefly indicate here the causes of this state of
things.
(a) Great Britain has been during this period a vast loaner of Capital
to other countries, and particularly to the United States; while the
United States has been a vast borrower of Capital, particularly from
Great Britain. The interest on these loans from Britain, and the
principal also so far as it has been repaid, has been constantly
remitted thither in goods for the most part, and bills of exchange
drawn on these goods have been sold at all ports, and particularly at
New York; the abundance of these bills has tended of course to lower
their price at the place of sale, and so far forth to heighten in
effect the relatively less abundant British bills drawn on exports
thence; and the _creditor_ country for this reason is apt to sell its
bills above "par," and the _debtor_ country its bills below par. It
makes no difference at this point how the borrowed funds have been
invested by the borrowing country, since the interest and the
principal must be repaid at some time chiefly in the manner just
indicated.
(b) With the exception of a dozen or two articles customs-taxed for
simple revenue, Great Britain in this period has kept her ports
absolutely open to imports from all the world, and of course to all
imports from the United States, which has tended to swell the volume
of imports into that country, and the volume of foreign bills drawn on
them, particularly of United States bills; while the United States
during the same time has excluded imports by customs-taxes designed
for that very purpose, to the number of over 4000, and in many cases
to a height of tax involving prohibition of import. The Constitution
of the United States expressly forbids customs-taxes upon exports, so
that goods may indeed go out freely, so far as tariff-barriers are
concerned; but as the only impulse that ever carries goods _out_ is to
get _back_ more desirable goods in pay, and as these return-goods are
greatly restricted or virtually prohibited by the United States, the
Constitutionally-free exports are not large enough to help much in
keeping down below "par" the price of bills of exchange drawn here. It
should also be said that Great Britain is restrained in her exports to
the United States by the latter's legal unwillingness to receive them,
which tends of course to keep the price of bills drawn on the exports
she can and does send still more above "par."
(c) The enormous customs-taxes in the United States on ship-building
materials and on almost everything else have practically destroyed the
ocean merchant-marine of the country. The bulk of the Freights,
therefore, on what foreign commerce there is left to us under the
Chinese-wall policy of our Government,--the bulk of the freights both
ways,--has to be paid to foreigners, mostly to the British, and these
payments too are made in exportable goods, which wretched fact (looked
at in its causes) increases exports hence relatively to imports
hither, and of course diminishes _pro tanto_ the current price of
mercantile bills drawn here. So far as these _extra_ exports to meet
freight charges are carried to England, they tend to lift there in the
usual way the price of bills drawn on British exports. It is a million
pities, no matter from what point of view one looks at it, that the
present governing classes of this country totally misapprehend the
Nature of foreign trade, and by short-sighted legislation minimize its
Benefits to the people.
So far we have been unfolding the causes and courses of foreign
exchange on the hypothesis, that both the nations exchanging employ
the same standard in measuring Values. While the present paragraphs
were in process of composition, the President of the United States
signed (July 14, 1890) the so-called "Compromise Silver Bill," which
is to go into operation after thirty days, and the effect of which in
the judgment of some of the best economists and financiers of the
country _may be_ to bring down the national measure of Values from the
gold dollar to the silver dollar. We are bound at this point,
therefore, to explain the action and reaction on the course of the
"exchanges," of a monetary standard lower in general value than the
standard prevailing in the commercial world. We have all the data
needful for clearing up this matter completely, at once in the
inflexible laws of Money and in the actual experience of several of
the Nations. For example, England has the gold standard, and India the
silver standard; there is an immense commerce between the two
countries; silver is merchandise and not money in London, and gold is
merchandise and not money in India; every cargo, accordingly, to and
from either has to have its value "changed" through the price of
current bills into the current money of the other country; the price
of silver in gold in London (average) between 1852 and 1867 was 61-1/3
pence per ounce; at 60 pence per ounce the ratio of gold to silver is
1:15.716; between 1875 and 1882 silver drooped (with many
fluctuations) in the London market, bearing about the average of
52-1/3 pence per ounce, which is a ratio with gold of 1:18; during the
first half of 1890 the price of silver in London was as nearly as
possible 43 pence per ounce, which is a ratio with gold of 1:21.93; so
that, the prices of India bills in London and of London bills in
Bombay have yielded up to the careful observer all the secrets of the
"exchanges" between high-standard and low-standard countries.
But we have no need to go out of our own country for illustrations of
all this. Between May, 1862, and January, 1879, the "Greenback Dollar"
was the measure of current Values. It was depreciated every day of
that interval as compared with the gold dollar, and it fluctuated in
the comparison more or less nearly every business day. The New York
importer bought his foreign goods for gold, paid the customs-taxes on
them in gold, and then sold them against greenbacks. How much must he
charge for his goods in order to make himself whole? The current
premium in gold over greenbacks was posted every day, and perhaps
every hour, but was that a safe guide to greenback prices for our
importer? Wholesales are rarely for immediate realization in money,
and even if they were, the money would have to be rechanged into gold
in the future for repurchases abroad. In the uncertainty of greenback
values, the importer must _insure himself_ in his prices to-day
against a possible further depreciation next week, or next month. In
other words, _he must speculate in the prospective gold premium_.
Suppose his industrial cycle to be one month. If he sell his foreign
goods in greenbacks to-day as these stand in comparison with gold, and
greenbacks fall still lower before the month is out, he will lose
money in those transactions; if greenbacks should rise in the
interval, he would gain money, because he could get more gold for them
in the next turn. To the credit of human nature be it said, that in 9
cases out of 10 a merchant will raise the present prices of his goods
in order to make himself as sure as possible in a case where all is
uncertain. There can be no reasonable doubt that in the fifteen years
of depreciated greenback units, retail prices to ultimate consumers
were lifted 10% above the average reckoning of goods in greenbacks
from this cause alone.
In regard to exports at that time the facts and principles are still
clearer. These exports were sold in Europe for gold. But the bills of
exchange drawn on them were sold in New York for greenbacks. Take
wheat, for example, of which there was a large export in all those
years. The New York broker or banker in buying these bills was obliged
to make the conversion from greenbacks to gold. He had to estimate as
well as he could what the value of greenbacks would be when the
gold-bill became payable in London. In other words, he had to
speculate in greenbacks, because he had to take the risk of their
declining or advancing value for an interval of time, say, one month.
He would not take this risk without virtually making a charge
sufficient in his judgment to cover it, and leave him a good profit in
any case. This charge came out of the price of the wheat ultimately
paid to the growers thereof. The bill of exchange was sold in New York
or Chicago in order to get present pay for the farmers who furnished
the wheat, and present profit for the commission-merchants or
middlemen. But the bill brought less greenbacks than the quoted
premium on gold would warrant for that day, on account of the risk,
the uncertainty, the speculation. Therefore, less went to the farmers
for their wheat per bushel or centner. _The masses of the people lose
the immense losses of that depreciated money._ And during these very
years also the Government put customs-taxes to a then unheard-of
height on imports from abroad, not primarily for the sake of the
revenue to come from the taxes, but chiefly with a view to keep
certain foreign goods out of the country altogether, in order that
_some_ citizens might be able to sell their own product _to the rest_
at artificially enhanced prices. Thus the natural market abroad for
wheat and pork and petroleum and other provisions was enormously
lessened by the prohibition of imports,--a market for products is
products in market,--at the same moment when the actual prices for
products exported were still further diminished by the action of
depreciated money on the par of commercial exchange.
Our neighboring Republic of Mexico has had for a long time the
so-called bi-metallic standard of Money, the same as the United States
have had.[9] When the great fall of silver in gold took place in the
London market as indicated above, gold was rapidly exported from
Mexico, and soon disappeared from circulation, in accordance with
Gresham's Law. For many years now the simple silver standard has
prevailed in Mexico. Its entire working in foreign trade through the
"exchanges" has been sufficiently demonstrated; and as there is more
than a possibility, more even than a bare probability, that the United
States under the law of 1890, and other and earlier extremely
complicated laws of Money, may drop from bi-metallism to silver
monometallism in the near future, in the way of premonition and
warning to our own people we may fitly close our discussion of foreign
"Exchanges" by briefly stating what of hazard and disaster under the
silver standard is now going forward among our neighbors to the
southward.
The effect of estimating Mexican transactions in silver money, while
all the nations with which they trade estimate theirs in gold, is seen
in an artificial enhancement of prices to the Mexicans on all their
imports, and an artificial depression of prices to them on their
exports. Look first at imports. There is of course a current discount
on Mexican silver as compared with the gold in which the imported
goods are bought. This discount is now over 20% throughout the
commercial world, the London price of silver in gold giving the key to
that song. But this is not all by any means; the discount is variable
from day to day and from month to month; in changing his gold prices
present into silver prices future, the Mexican importers must insure
themselves. This necessitates a speculation in the future of silver.
What the risk may be will depend somewhat on the activity of the
silver market: if silver be rapidly fluctuating in price, the importer
will add more to his silver prices additional to the current premium
on gold, than if silver be comparatively stable; but in all cases he
will add enough to cover all prospective risks. It is quite likely
that five _per centum_ is added on the average to wholesale prices by
Mexican importers on this ground alone, which addition with all the
usual increments must be borne by retail and ultimate prices.
Now look at Mexican exports. The larger part in value of these exports
is silver in some form, mostly in the form of silver dollars. But
these silver dollars are merchandise in London, and quite variable in
price there, as has already been shown; and bills of exchange drawn on
this silver in any form, and sold in Mexico to parties remitting gold
values to London, are subject to constant depression on account of the
uncertainty as to the value of silver in gold when the bills reach
London. It follows from this, that the use of the silver standard in
Mexico actually depresses the value of silver there. By means of the
"exchanges" both ways, silver tends to be still further depreciated in
comparison with gold, retail prices of all importables enhanced in
silver, and the chief exportable (silver) depressed in value all the
while! Truly, the Mexicans are between the upper and nether
millstones. Poor Money never pays.
In confirmation of this fact that Mexico has not lifted the relative
value of silver by making it the sole Measure of Value, we have the
corresponding fact that the herculean efforts of the United States
since 1878 to advance the value of silver to a parity with that of
gold in the legal ratio of 1:15.98, have issued in the constant
relative decline of silver here; and, what is more surprising, in an
almost constant increase of the yearly production of silver here. The
following table tells the whole instructive story: the figures are
official: commercial "fine ounces" are .915 of technically "fine"
silver.
+------+--------------+-------++------+--------------+-------+
| Year.| Production |Average|| Year.| Production |Average|
| |(fine ounces).|Price. || |(fine ounces).|Price. |
+------+--------------+-------++------+--------------+-------+
| 1878 | 34,960,000 | $1.15 || 1884 | 37,800,000 | $1.11 |
| 1879 | 31,550,000 | 1.12 || 1885 | 39,910,000 | 1.06 |
| 1880 | 30,320,000 | 1.14 || 1886 | 39,440,000 | .99 |
| 1881 | 33,260,000 | 1.13 || 1887 | 41,260,000 | .97 |
| 1882 | 36,200,000 | 1.13 || 1888 | 45,780,000 | .93 |
| 1883 | 35,730,000 | 1.11 || | | |
+------+--------------+-------++------+--------------+-------+
These Seven, then, are the essential Principles of Foreign Trade,
brought out, it is hoped, as clearly and consecutively as the relative
and complicated nature of the transactions will allow; in the light
of these Principles it is very clear, that Foreign Trade is just as
legitimate as, and may be more profitable than, Domestic Trade; that
it rests on the same ultimate and unchangeable grounds in the
constitution of Man, and in the Providential arrangements of Nature;
that the Profit of it is mutual to both parties, or it would never
come into being, or, coming into being, would cease of itself; that to
prohibit it, or restrict it, otherwise than in the interest of Morals,
Health, or Revenue, must find its justification, if any at all, wholly
outside the pale of Political Economy; and that for any Government to
say to its citizens (of whom Government itself is only a Committee),
who may wish to render commercial services to foreigners in order to
receive back similar services in return, that such services shall
neither be rendered nor received, is not only to destroy a Gain to
both parties, but also to interfere losingly with a natural and
inalienable Right belonging to both.
If the reader pleases, we will turn now, in the second place, to the
METHODS AND MOTIVES IN VOGUE TO RESTRICT AND PROHIBIT FOREIGN TRADE.
The instrument for this purpose is called a _Tariff_. The origin of
the word Tariff, its nature and kinds, will throw much light upon what
has been a vexed question, but is one easily solvable, and indeed long
ago resolved.
1. Origin.--When the Moors from Africa conquered Spain in the year of
our Lord 711, they fortified the southernmost point of the peninsula
where it juts down into the Straits of Gibraltar, and by means of
their castle and town, called in their Barbary language _Tarifa_,
compelled all vessels passing through the Straits to stop and to pay
to these Moorish lords of the castle a certain part (determined by
themselves) of the value of the cargoes. This payment appears to have
been blackmail pure and simple; it was certainly extorted by force;
and whether there were any pretence of a return-service in the form of
promised exemption from further pillage or not, that made no real
difference in the nature of the transaction. Eleven centuries later,
the United States demonstrated what they thought about similar
extortions on American commerce practised in the same waters by the
descendants of these same Moors, by despatching Commodore Decatur with
a strong fleet to Algiers and Tunis and Tripoli; to which piratical
states they had already paid in twenty-five years two millions of
dollars in "tribute" or "presents" for exemptions of their
Mediterranean commerce from plunder; who captured the pirate ships and
compelled the terrified Dey of Algiers (and the rest) to renounce all
claim thereafter to American "tribute" or "presents" of any kind. The
word _Tarifa_, accordingly, in English and other modern languages, a
word which seems to be very dear to some men's hearts, does not appear
to have had a very respectable origin, though that is not sufficient
of itself to condemn the thing described by the word. That will depend
upon its nature and purposes.
2. Its nature.--There never was one particle of doubt on the part of
those compelled to pay the Moorish demands at Tarifa, or on the part
of the United States compelled to pay "tribute" to the Algerines for a
quarter of a century, about the _nature_ of the transaction. The sign
at Tarifa was _minus_, and not _plus_. To the credit of those pirates
let it be said, that they never pretended to take what they took for
the _benefit_ of those from whom they took it. They took it for their
own benefit. The action was abominable, but it was aboveboard. There
was no deceit and no pretence about it. Both parties knew perfectly
what was going on. What was delivered was just so much _out_ from what
would otherwise have been the _gains_ of the voyage. And the truth
is, the thing, tariff, is always true to the origin of the word,
tariff, so far as this, that a tariff always _takes_, and never
_gives_. The only phrase a tariff speaks, or can speak, is, _Thou
shalt pay_! There is lying open on the table of the writer at this
moment a stout volume of 417 pages, printed, with nearly as many more
interleaved, entitled Tariff Compilation, published by the United
States Senate in 1884, containing every item of all the tariffs passed
by Congress from 1789 to the present time. One may read this volume
from beginning to the end, or he may read it from the end backwards to
the beginning, or he may begin in the middle and read both ways, and
all he will find between the covers is a series of _Demands_ made upon
somebody to _pay_ something. These demands, of course, are made upon,
and realized from, the citizens of the United States, who are the only
people under the authority and jurisdiction of the Congress. A tariff,
then, may be correctly defined as _a body of takings or taxings levied
upon the people of any country by their own government on their
exchanges with foreigners_. How anybody can intelligently suppose that
a body of _taxes_, which their own countrymen will have _to pay_, can
be so cunningly adjusted as to become to them a positively productive
agent, a blessing and enrichment to the payers, a spur to the progress
of their Society, _they_ may be properly called upon to explain who
pretend to believe such an absurdity in the nature of things.
3. Its kinds.--There are two kinds of Tariffs under our general
definition, very diverse from each other in their respective purposes,
principles, incidence, and results.
(1) There is a tariff for Revenue. The sole purpose of a revenue
tariff as such is to get money by this mode of indirect taxation out
of the pockets of the People for the coffers of the Government, in
order to be then expended, governmentally, for the general benefit of
those who have paid the money in for that single end. The underlying
thought of this kind of tariff, a tariff for revenue only, is, that
the Government itself shall get all the money which the people are
obliged to pay under these taxes, except the bare cost of collecting
them; that only _such_ taxes shall be levied at all as will come
bodily and readily into the general Treasury for public uses; and no
intelligent and justice-loving people will long tolerate tariff-taxes
laid with any other intent than the economical support of their
government, or laid in any other way than shall bring into the
Treasury all that is taken out of the People. A Revenue Tariff,
therefore, may be properly defined as _a schedule of taxes levied on
certain imported goods with an eye only to just and general taxation_.
There are three vital principles on which a revenue tariff as such
must always be levied. (a) As the sole object is to get money for the
national treasury, and as money can only be gotten as the foreign
goods taxed are allowed _to come in_, such taxes must be levied at _a
low rate_ on each article taxed, so as not to interfere essentially
with the bringing in of that class of goods with a profit to the
importers, and not at all to encourage the smuggling of them in. (b) A
varied experience of all the commercial nations has shown, that it is
not needful in order to derive a large and growing revenue to lay even
low rates on _all_ goods imported, but only on certain classes of
them, so as to burden at as few points as possible the successful
ongoing of international exchanges; since the prosperity ever induced
by commercial freedom enables a country to import and to pay for in
its own quickened products vast quantities of the articles subjected
to the tax, so that large revenues come from low rates levied at few
points. Here we lay bare the ground of a great income in the
exemption of the bulk of imports from any tax at all. (c) Custom-taxes
should be laid wholly or at least mainly on articles procured from
abroad, and not also produced at home; for otherwise the incidence of
the tax on the portion imported will necessarily raise the price also
of that portion made or grown at home; and thus the people will pay
_more_ money in consequence of the tax than the Government _gets_ from
the tax in revenue. Three points, then, in a revenue tariff, namely,
_low duties on few articles, and these wholly foreign_.
The best modern example of a purely revenue tariff is that of Great
Britain since 1860. All duties are on one or other of the following
sixteen items, namely, Beer, Cards, Chiccory, Chocolate, Cocoa,
Coffee, Fruit, Malt, Pickles, Plate, Spirits, Spruce, Tea, Tobacco,
Vinegar, and Wine. Of these, Spruce yielded no revenue in 1880; Cards,
Malt, Pickles, and Vinegar, yielded in the aggregate that year only
£1.491; leaving the other eleven items to furnish practically all the
customs revenue; but of these Coffee and its three substitutes with
Beer and Plate, furnished only £337.258, so that, the remaining five
articles yielded £18.915.489, or 98% of the whole income in 1880. In
other words, Fruit, Spirits, Tea, Tobacco, and Wine, brought in all
but 2% of the customs-taxes of Great Britain in 1880. In 1890, the
duties on certain Wines and Spirits having been lifted, there was a
large surplus of revenue over the Estimates, which has just been
devoted to the enlargement of the Navy. Every other European
commercial country had a deficit that year as compared with its
Estimates of the year preceding. The figures are not now at hand for
an exact statement, but there can be little reasonable doubt that the
"Five Articles" rendered at least 98-1/2% of the tariff-taxes of
England last year. If there be also some domestic production of any
article taxed by the British tariff, a corresponding excise-tax on
that part produced at home, which part would otherwise be raised in
price by the tariff-tax to no advantage of the Revenue, enables that
Government to get easily all that the people are made to pay in
consequence of the tariff-tax on the imported part.
(2) There is a tariff under Protectionism so-called. The ruling aim in
this second kind of tariff is not at all to obtain income for
Government in order to promote the general good, but on the contrary
by means of heavy taxes on _foreign_ articles to raise the prices of
corresponding _domestic_ ones for the exclusive benefit of a few
producers of these home goods at the expense of all home buyers of
them. If these special tariff-taxes be so high and complicated as to
keep out altogether the foreign articles, and so the Treasury realize
nothing at all from the taxes on them, so much the more
"protectionist" do they become, and so much the better pleased are the
special domestic producers with the entire monopoly of the home market
at their own prices. Such taxes are prohibitory and protectionist at
the same time. Prohibition is the perfection of Protectionism. A
Protectionist Tariff, accordingly, may be justly defined as _a body of
taxes laid on specified imported goods with a single eye to raise
thereby the prices of certain home commodities_.
The vital points of a protectionist tariff are also three, but these
are the exact opposites and antipodes of the three points of a revenue
tariff, so that it is self-contradictory and impossible to combine in
one tariff-bill the two sets of contrary elements. A revenue tariff
with incidental protectionism is a solecism. (a) If a tariff-rate is
to be protectionist in character, that is, competent to raise the
price of home products, it must be _high_, so as either to exclude
altogether the corresponding foreign products, in which case there is
no revenue at all, or else to make their price by means of the duty
added reach the point at which the home producers plan to sell their
own, in which case there will be very little revenue. For instance,
when the Bessemer steel companies asked in 1870 for two cents a pound
tariff-tax on foreign steel rails, they called it in terms in their
"confidential" statement to the Ways and Means "_exceptional
protection_," and admitted in so many words that they expected to
supply the home market entirely, and so the Government would get
_nothing_ in revenue and the people be compelled to pay $44.80 _extra_
for their home steel rails per ton. It is a little bit of comfort to
think, that they only obtained $28 per ton, or 1-1/4 cents per pound,
which was not quite prohibitory, so that the Government got a little
revenue on steel rails, and the people paid for some years only about
_double_ for their rails what they were worth in a free market! To
reach its end a protectionist tariff-tax must be _high_ of necessity.
(b) No system of protectionist tariff-taxes can be entered upon or
continued in any country except by means of many persons who all alike
want their special products artificially lifted in price by
legislation, and who are obliged _to combine_ in order to get and keep
what they want, so that protectionist taxes on a few things only were
rarely or never found in a tariff; so contrary are such taxes to the
common sense and common interests of man, that only strong
combinations of many special interests can begin or maintain them,
whence there must be _many_ taxes if any under this strongly selfish
scheme; and by an actual count of them by the writer in 1868 there
were found to be 2317 distinct rates of tax assessed on different
foreign articles in the Tariff of the United States, which was
strikingly in contrast with the Revenue Tariff of Britain in point of
the number of things taxed. So needful is log-rolling to the
maintenance of protectionism, that the passage of the "knit-goods
bill" in the summer of 1882, for example, was contingent on the
contemporaneous passage of the famous "River and Harbor bill" of that
year.
(c) While Revenue Taxes select by preference things wholly imported,
Protectionist Taxes are placed of course on such foreign goods as are
also and especially made or grown at home, otherwise their plain and
sole purpose would be thwarted, which completes the contrast between
the two kinds of tariffs. For illustration, Tea and Coffee are the
best things possible to tax in a tariff for revenue, because (1) they
are in universal consumption, and (2) they are wholly imported, and
taxes upon them do not raise the price of anything else, and so the
Government gets all that the people pay under them; for this very
reason the taxes upon Tea and Coffee, which had yielded for years some
$20,000,000 of revenue yearly, were thrown off in 1872 under
protectionist leadership, by the deceptive cry of "_a free breakfast
table_," in the subtle interest of commercial bondage; seeking to give
the impression on the one hand that everything on the breakfast table
was to be free, whereas nothing on it or around was to be free except
the two beverages mentioned, and on the other hand that the removal of
these two taxes was a great boon to the people, whereas the motive for
the removal of these was _to continue_ on the people burdens tenfold
heavier. Eighteen years have rolled away since then, and Tea and
Coffee are still upon the free list; the incompatibility of the two
kinds of tariff-taxes is demonstrated in the fact, that there has not
been for years a single tax primarily for revenue in the United States
tariff,[10] the opposite protectionist idea having logically wrought
itself out there; and the same incompatibility is shown in the
British tariff, in which there has been no protectionist tax since
1860. Each aim logically carried out completely excludes the other
aim.
The best and worst specimen of a protectionist tariff that the world
has ever seen, has been in operation in the United States for thirty
years, 1861-1890. Its inner history is not yet fully known by the
public, but enough is known to expose the motives and to condemn the
action of all those, whether constituents or congressmen, who knowing
what they were doing, contributed to build up gradually that mass of
incongruities and iniquities, under which the entire agricultural
class of the country (nearly one-half of the people) has become
impoverished, by much the larger part of the farming lands of the
Union covered by heavy mortgages, and the ocean-marine of a naturally
nautical people almost totally destroyed. Attempts more or less
successful have been made at various times and at different points to
conceal from the Public the impulses really behind the provisions of
this tariff, and even the amount and the mode of the incidence of its
taxes; many of the most protectionist taxes have been complex,
combining upon the same article _specific_ and _advalorem_ rates, as
for instance, upon blankets "_50 cents per pound and 35% advalorem_,"
so that it was difficult or rather impossible for the common reader or
buyer to ascertain how much the tariff-tax really was; much of the
language of the tariff-bills has been to the last degree involved and
uncertain, often leading to perplexing disputes and costly litigations,
and sometimes covering up a half-hidden purpose; importers have been
bribed, as it were, in cases of doubtful legality, to pay the maximum
rates demanded, by the prospect and promise that the extra sums if
ultimately found by the courts illegal should be repaid bodily _to
them_ and not to the people who in the mean time had bought and paid
for the goods thus enormously enhanced in price, and millions of the
people's money have gone back in that way to importers and to spies and
informers; a careless wording in tariff-descriptions has again and
again covered goods not designed to be touched, as the lastings and
rubber webbings of the shoemakers to the consternation of that great
interest, which asked for no protectionist privilege for itself, but
wanted its raw materials at their natural price; and the iron industry
of Pennsylvania was bitterly angry at Secretary Sherman, who construed
a line of the tariff relating to cotton ties used at the South more
favorably to the planters than to the iron-workers, although the latter
were strongly privileged at every point of the tariff (even at this) in
the teeth of the interests of the consumers of iron, and the later
honorable ambition of the Secretary to become a candidate for the
Presidency of the United States was largely thwarted in consequence by
the hostility of these miserable and revengeful monopolists.
There were fifty descriptions of iron and steel taxed by the tariff in
1879, and the average rate of tax on these at that time was 77%
_advalorem_, and this was about the average rate for the thirty years
under the consideration. On special articles of prime necessity and
universal consumption, as steel rails, the tax varied under the rate
of $28 per ton put on in 1870 from 85% to 100% _advalorem_; and the
purpose of this particular tax was plainly seen in an average price of
domestic steel rails in this country $24.44 a ton higher than in
England for better rails under a longer guarantee for the eleven
years, 1870-80; in other words, 87% of the tax paid on the smaller and
better part imported was added to the average price of the larger and
worser part produced at home during those eleven years. That the
English rails were better and even regarded as cheaper under their
guarantee with the $28 a ton added to their price, is proven by the
fact that the N. Y. Central railroad company relaid their tracks with
the English rails, and were putting them down in Detroit in plain
sight of simultaneous track-laying across the river in Canada, where
the same kind of English rails were costing $28 a ton less. Every
passenger and ton of freight carried by steel-track roads in the
United States in this interval contributed his and its share to make
up to the roads this _extra_ price paid for steel rails. In 1883 the
tariff-tax on steel rails was reduced to $17 per ton. That this
enormous artificial price of iron and steel products under
tariff-taxes redounded wholly to the profit of the capitalists
concerned, and not at all to the benefit of the laborers concerned, is
shown by the Census of 1880, which gives $393 as the average pay for
that year of the persons employed in the iron and steel industries of
the country; and the late Senator Beck of Kentucky demonstrated on the
floor of the Senate, _nemine contradicente_, that only 8.8% of the
value of the products of the Bessemer steel industry in 1881 went to
the laborers employed in it, while 66.9% of the same went to the
capitalists as profits. Let the thoughtful reader remember at this
point, that iron and steel products are only one of an indefinite
number coddled and privileged by the tariff at the expense of the
masses of consumers.
It is impossible to tell exactly _how much_ more the people of the
United States were compelled to pay for their commodities under
tariff-taxes, whose ground-thought was to compel them to pay more and
the more the better, than the Treasury received as the direct product
of these taxes during 1861-90, but an approximation can be made within
the truth whose results are fitted to startle the minds of all good
citizens. For convenience' sake only, and because the official
figures are complete for the shorter period, let us take for
comparison the twenty years, 1863-82. The annual average tariff-income
for those 20 years was in round numbers $158,000,000; but the
ground-thought of the tariff-scheme in all those years was not to get
an income for Government, but factitious prices for capitalists
privileged by law; and during the last half of the time there were no
tariff-taxes on Tea and Coffee, which had been before the principal
revenue taxes. If, now, we may fairly suppose, that for each _one_
foreign article paying a tax into the Treasury there were _four_
domestic articles raised each in price as much as the foreign article
paid in customs-tax, then it follows, that the People paid in each of
those 20 years under customs chiefly protectionist, $632,000,000, or
$12,640,000,000 in all, no penny of which went into the Treasury of
the United States. That this supposition of 4:1 is wholly reasonable,
appears partly from the known proportion (officially reported) between
Domestic and Imported as to several leading articles, for example, of
steel rails in 1880 the Domestic was 20 times the Imported, and the
People paid 19 times more under the tax than the Treasury got; and on
woollen blankets in 1881 the Treasury took in less than $2000, while
the People paid in the _extra_ price of blankets more than 1000 times
that sum that year; and on iron and steel goods of all kinds the
average tariff-taxes were about 77% in that interval of time and the
vast bulk of the iron and steel goods consumed was boasted to be of
domestic production.
Let us confirm these striking results by another more than reasonable
supposition taken from the opposite quarter. The census of 1870 gave
$4,232,000,000 as the value of home manufactures for that year, which
we may fairly take as the average of the 20 years under consideration;
now, if we throw off one-third of those home products as not affected
by the tariff at all, and reckon that the rest were only raised in
price 22%, which was only one-half of the average rate of tax on
dutiable goods,--the average rate on these was officially pronounced
in 1880 at 44%,--then almost precisely the same results will follow as
before: two-thirds of $4,232,000,000 is $2,880,000,000, and 22% on
that sum is $633,600,000. An acknowledged statistical expert of
national reputation, Mr. J. S. Moore, calculated from data quite
diverse from our own, that the People paid $1,000,000,000 in the one
year, 1882, _extra_ to the sum reaching the Treasury that year, under
protectionist tariff-taxes. We see, then, clearly the _methods_, by
which Protectionism reaches its ends, and we cannot but conclude, that
these methods issue in monstrously unjust burdens on the masses of the
People.
It remains, under this second general head, to examine the _motives_
of those men, who have gotten the protectionist tariff-taxes put upon
the different classes of imported goods in this country. Fortunately
we have data of unquestionable authority, covering the entire first
century of our national existence, which prove these two propositions:
first, _that no protectionist tax has ever been_ PUT ON _by our
Congress from the first day until this day except at the instance and
under the pressure of the very men personally and pecuniarily
interested to secure thereby an artificial rise of price for their own
domestic wares_; and second, _that these very men have been almost, if
not quite, as active and determined_ TO KEEP OFF _protectionist taxes
on other goods used by them in their processes of production, whether
raw material, machinery, or accessories_. These two propositions,
taken together, demonstrate beyond a cavil the motives of the
protectionists as a class. Of course, they have had their dupes and
tools. Out of their own mouths and out of their own actions are they
to be judged. One hundred years is long enough of time in order to
display perfectly the motives of a prominent and persistent class of
men, under that Government of the world, whose key-note is Exposure,
and under that maxim of the world, Actions speak louder than words.
Thomas H. Benton, a United States Senator from Missouri for 30 years,
1820-50, himself in all that time a prominent leader and debater, and
always an indefatigable investigator, published an _Abridgment of the
Debates in Congress from 1789 to 1856_ in 15 large volumes. Each
important tariff Debate for the first 70 years of our national history
is distinctly brought out in these volumes, and the impulses and
motives behind each leading speaker may be discerned as clear as day.
The present writer has been over these debates with great care, and
has mastered them in their substance and motives on both sides; and he
has been besides a deeply interested reader and excerptor of all
Congressional tariff-debates for more than 30 years just past; and now
invites his present readers to take a cursory glance over this broad
field, and satisfy themselves as to the motives personal and associate
of the protectionist debaters from the first to the present time.
Because the new Constitution prescribed that "_all bills for raising
revenue shall originate in the House of Representatives_," the main
debates on the first tariff-act of 1789 were in that branch of the
national Legislature. Nothing could be simpler or sounder than the
basis of the new tariff as proposed by Madison, the acknowledged
leader in the debates, namely, the so-called Revenue System of 1783,
as adopted by the old Congress, and ratified by all the States in
succession, excepting New York. That was, small specific taxes on
eight articles, namely, Wines, Spirits, Tea, Coffee, Cocoa, Molasses,
Sugar, and Pepper. In the earlier part of the discussion no other end
than revenue was mentioned in connection with the taxes. Madison
said: "_I own myself the friend of a very free system of commerce: if
industry and labor are left to take their own course they will
generally be directed to those objects which are most productive, and
that in a manner more certain and direct than the wisdom of the most
enlightened legislature could point out; nor do I believe that the
national interest is more promoted by such legislative directions than
the interests of the individuals concerned._" It is significant of
after times that the first word in this debate respecting any other
word than revenue through the tariff-taxes came from Pennsylvania; and
equally significant, that the next and strongest words for something
else than revenue came from Massachusetts; and more significant than
either was the junction of the two States in influence and votes when
it came to the final adjustment of the actual tariff-rates.
Pennsylvania had already gotten well forward in the manufacture of
iron and steel products, particularly of nails, and wanted
"_encouragement_," that is, protectionist taxes upon the foreign
products corresponding. Said Hartley of Pennsylvania: "_I am therefore
sorry that gentlemen seem to fix their mind to so early a period as
1783; for we very well know our circumstances are much changed since
that time: we had then but few manufactures among us, and the vast
quantities of goods that flowed in upon us from Europe at the
conclusion of the war rendered those few almost useless; since then we
have been forced by necessity, and various other causes, to increase
our domestic manufactures to such a degree as to be able to furnish
some in sufficient quantity to answer the consumption of the whole
Union, while others are daily growing into importance. Our stock of
materials is, in many instances, equal to the greatest demand, and our
artisans sufficient to work them up even for exportation. In these
cases, I take it to be the policy of every enlightened nation to give
their manufactures that degree of encouragement necessary to perfect
them, without oppressing other parts of the community._"
Massachusetts was not a whit behind Pennsylvania in asking for
discriminations in her own favor at the obvious expense of the rest of
the country. New England rum was made out of molasses, and Jamaica rum
was its competitor in public favor; distillers in the neighborhood of
Boston and Salem wanted therefore a _high tax_ on Jamaica rum, and a
_low one_ on the imported molasses used in the home manufacture.
Madison was willing to discourage rum-making and rum-selling both in
the interest of temperance, and proposed a tax of eight cents a gallon
on molasses and fifteen cents on Jamaica rum, which called out this
indignant burst from Goodhue of Massachusetts: "_Molasses is a raw
material, essentially requisite for the well-being of a very extensive
and valuable manufacture. It ought likewise to be considered a
necessary of life. In the Eastern States it enters into the diet of
the poorer classes of people, who are, from the decay of trade and
other adventitious circumstances, totally unable to bear such a weight
as a tax of eight cents would be upon them. I cannot consent to allow
more than two cents. Massachusetts imports from 30,000 to 40,000
hogsheads annually, more than all the other States together. Fifteen
cents, the sum laid on Jamaica spirits, is about one-third part of its
value: now eight cents on molasses is considerably more: the former is
an article of luxury, therefore that duty may not be improper; but the
latter cannot be said to partake of that quality in the substance, and
when manufactured into rum is no more a luxury than Jamaica spirits._"