ECONOMIC HISTORY OF THE UNITED STATES: THE TARIFF OF ABOMINATIONS AND NULLIFICATION

THE TARIFF OF ABOMINATIONS AND NULLIFICATION

Benjamin Franklin once noted, and many historians disagree, that “No nation was ever ruined by trade.” However, considering the ebb and flow of American history during Franklin’s lifetime, it is quite probable that Franklin meant was that free trade never hurt any nation. But whether he meant it or not, there is as much difference between “trade” and “free trade” as there is between “branch” and “stagnant water.”

Benjamin Franklin’s term “trade” carried with it a deeper meaning than simply goods loaded onto ships and sold to consumers in other cities, states, and countries. The first step in developing a commercially based economy is to have an economic climate making it possible to create a product to sell. Further, the product must have been produced efficiently enough to make its price competitive in the marketplace. In terms that Franklin would have understood, if the English taxes on American tobacco were too high, Cuban tobacco could sell more cheaply on Dutch markets thus forcing the American tobacco planters to reduce price which, in turn, could put them out of business.

Alexander Hamilton understood this concept very well. If America was to survive as an independent nation, its political independence had to be followed by economic independence. No nation was truly free if one product or one buyer controlled a nation’s productivity. At the same time, no nation could be economically self-sustaining if it did not protect its own businesses from being run into bankruptcy by cheaper foreign goods.

When the United State Constitution was framed, the Founding Fathers were acutely aware of the importance of developing an economy that would survive the onslaught of foreign goods — and particularly cheap foreign goods. They, as founding fathers in other nations had done before them, made certain that incoming foreign goods were taxed, and outgoing domestic goods were not. To this end, America’s founding fathers gave Congress the exclusive right to assess and collect import fees in Article I, Section 8, Paragraph One. Further, to make absolutely certain that there would not be a movement by Congress to tax exports, the Constitution also contained Article I, Section 9, Paragraph Five which clearly stated: “No tax or duty shall be laid on article exported by any state.”

The bottom line, as Alexander Hamilton, America’s first Secretary of the Treasury, was to make certain that America would be protective of its own “infant industries” and keep them vibrant in the face of unfair competition from more established non-American firms. Young industries, he knew, were often driven out of business by older, foreign firms because of a lack of import tax.

As a theoretical example, at the end of the American Revolution there were very few American firms that produced, let us say, plows. But there were English firms of long standing which did produce plows. Therefore, if an American wanted to buy a plow, more than likely he would have bought an English plow.

An American businessman, judging that he could produce a plow of equal quality to the

English plow at the same price, might start a business and try to sell his plows at a cheaper rate. (Remember, the British plow still has to be shipped to the United States which gives the American company a slight advantage because the American plow does not have that transportation charge.) Thus the American would open his business, produce plows, and sell them at a competitive price.

The English business, however, would see that it was being undersold on the American market and it would cut its price to make his plows cheaper than the American plows — even with the transportation cost added. The English business had more money at its disposal and could take the loss if it meant driving the American competitor out of business. Or the English business could have cut the price of its plows on the American market and raised them on the French and Italian markets thus showing no overall loss of profit.

But the American could not afford to take a loss so soon after starting his business. As it was a small business, it did not have the financial backing that the larger company enjoyed. All other things being equal, the American company would find itself slowly squeezed out of business.

But this scenario does not take into account government interference. Once the American business realized that it was being undersold and on the road to bankruptcy, it would immediately go to the government and ask that an import tax be place on British plows. Assuming that the government obliged, the British company would now have another expense. Every plow that entered the United States would have an import tax applied. This would increase the price of the British plow because that tax is going to passed along to the final consumer in the price of the plow. In other words, if the British plow cost $10 to make, $5 to ship, and the company wanted to make a $2 profit, the plow would cost a farmer $17. But if there was a $1 import tax, or tariff, on every plow, the farmer would be forced to pay $18 for the British plow. If the American company was selling plows for $18 apiece, then the farmer would have his choice of plows and would choose on the basis of quality, not price. In this case, the import tax would force the foreign company to charge more for its product on the American market and, at the same time, allow the smaller, American company to survive — as long as it sold a product of at least equal quality.

If humans were prefect, this scenario would work admirably. But a human, as Alexander Hamilton pointed out, “is a reasoning animal rather than a reasonable animal.” Taking this scenario of the plows one step further, one might ask what happens when the American business has the money to survive a trade war. The American company has been in business for ten years and has $10 million in the bank. Wouldn’t it be in the interest of the consumer to remove the tariff and let the British company lower its price back to $17 thus forcing the American business to lower its price to $17? Then the consumer would have the same quality of plow at a $1 less. This seems reasonable and ideally the government would step out of the economic picture by removing the import tax. Then the two business would cut prices lower and lower until an equilibrium was reached which would ultimately be in the best interest of the consumer who is getting the best quality plow at the lowest price.

Unfortunately this does not happen. As soon as the American company has money in the bank, it will probably lower its price a bit, by say $.50. Now the American plow is selling for

$17.50 while the British plow is still selling for $18. If the English firm tries to cut its price, the American company will scream “unfair foreign competition” to the United States government and import taxes will go up. So the British company lives with the indignity of seeing that it is being undersold on the American market.

One should not feel too sorry for the English company for the English government is doing the same thing to the American plows in England. Thus England, like the United States, protects its own industries.

As an added note, if the United States government raised the import tax, or tariff, on plows and the British government followed suit, the United States government might retaliate by raising tariffs on plows again. The British would then retaliate by raising import taxes. And, and, and ad nauseam. This is known as a “trade war.” In this case, the price of plows on the American market would get higher and higher with the American product barely underselling the British model. On British markets, the trend would be reversed. In the end, the big loser would be the consumer for higher prices do not necessarily mean better quality; just greater expense to the consumer.

The flip side to this argument is generally referred to as “Free Trade.” Free trader contend that the tariff scenario is bogus because what happens is that prices will go up but the quality of the product does not. In the example above, the only competition is price, not quality. While the two companies jockey for the best market share based on price, very little is done to improve quality. Free traders say the best way to improve quality and drop price is to remove the tariffs. In this way every product will compete on the basis of both quality and price. And, as the price drops, the consumers in every country will be the beneficiary.

Further, the free traders contend, as prices of products drop, there will be more money for the consumers to spend on other products in their own country. Using the plows in the section above as an examples, if the true price of producing a plow in England was $10 and transportation costs, $3, then the true wholesale price of the plow should be $13 — with another dollar for the American retailer. That means that true retail price would be $14, not the $18 which includes the American tariff. By allowing free trade, the price of the plow would drop to $14 and the additional four dollars could be spent by the farmer on other commodities. Thus the consumer would be the big winner. The only loser, say the free traders, is the American plow maker who artificially raised prices to compete with the British firms, a political motive, not an economic one.

From the point of view of American history, tariffs had a devastating effect on the South in the years before the Civil War. Because of the geologic and topographic differences between North and South, it was economic for the South to be an agricultural society. The flatlands were

easily farmed and the slow-moving, broad rivers were ideal for the transportation of large amounts of cotton on barges. The North, on the other hand, had rocky soil and fast-moving rivers which made large-scale farming difficult. The natural features did open the door to the use of waterpower and thus manufacturing became a reasonable industry. As each area developed its own particular economic base, it also developed its own unique economic outlook.

Take the tariff. Since most of the manufacturing in America before the Civil War was in the North, northern businesses were strongly in favor of high tariffs. Those taxes protected their businesses. Southern planters, who had to buy the manufactured goods, ended up paying the tariff. If they bought the British plows, for instance, they were paying $1 a plow more to protect a Northern business. If they bought the American-made plow, they were still paying $.50 more because the American firm was undercutting the British firm — but still taking advantage of the situation. If there was a trade war, the Southern farmers ended up paying more and more for products that went directly into the pocket of Northern manufacturers.

The South had other reasons to dislike the tariff as well. Since the bulk of the United States government’s revenue was generated by tariffs, it appeared to the South that they were the ones footing the bill for operation of the nation. Further, since much of the money was spent for internal improvements — and the lion’s share of those improvements seemed to be in the North — the South also believed they were paying for improvements in the North which did not benefit them at all.

From the South’s point of view, the picture was bleaker still. The more internal improvements were needed — such as roads, canals and railways — the higher the import tax would have to be to cover that construction. In turn, the higher prices were to get goods the

Southern planters had to buy to stay in business. They were being bled financially dry to keep Northern industrialist rich and internal improvements under construction in the North.

From the North’s point of view, the tariffs and internal improvements were necessary. If tariffs were not kept high, American businesses would fail. This would mean Northerners would not be buying Southern cotton. By the LAW OF SUPPLY AND DEMAND, more cotton on the market would drive the price of cotton down and the South would slip into a recession.

With regard to internal improvements, the North pointed out, the South didn’t need them. Their countryside had broad, slow moving rivers and a flat countryside where roads would be built with ease. In the North, the railroads, canals and roads were necessary because that was the only reasonable means of transportation. Certainly the lion’s share of the internal improvements were in the North, it was pointed out by Northerners, but the North needed those improvements; Mother Nature gave the South its transportation network at no cost.

But the acrimony over the tariff continued with the South believing that the North was leaching Southern money and the North outraged that the South couldn’t understand that a railroad meant that Southern cotton converted into cloth by Northern factories could be sold to Western city dwellers cheaper than English broadcloth.

There was an uproar in 1826 when the tariff was raised and the ire was still simmering two years later when Northern businessmen, particularly the manufacturers of woolen material, were hammering at their congressmen to raise the tariff again. Southerners were, as expected, opposed the tariff. But the Jacksonians — or more accurately, those supporters of Andrew Jackson who expected him to run for the Presidency of the United States — were able to raise the tariff over Southern objections. Jackson’s forces were so successful in raising the tariff, which immediately became known as the “Tariff of Abominations,” that one senator noted wryly that the tariff had “changed into a machine for manufacturing Presidents, instead of broadcloth and bed blankets.”

The news of the tariff was not received well in the South. Threats of secession, or the splitting of the United States into more than one nation, poured into Congress and talk of boycott of Northern products was widespread. John C. Calhoun, then Vice President of the United States under John Quincy Adams, capped the feeling of the South in an anonymous pamphlet in which he developed in great detail the concept that a tariff was not constitutional as well as the position that a state, individually, had the right to nullify or ignore a Federal action such as a tariff. These two concepts were quickly adopted by the South Carolina Legislature and came to be known as the South Carolina Exposition of 1828.

This latter issue became known as “Nullification,” the belief that a state had the right to overrule the laws of the federal government. It was a very dangerous precept for it opened the door to allowing states to avoid their obligations as members of the union. Using a modern-day example, suppose the State of California decided that its residents should not have to pay income tax. The reasoning behind this might be that if Californians don’t pay income tax, they will spend the money they would have given to the IRS on houses, cars, and clothing or in restaurants and nightclubs. Thus the money from California that would have been spent nationwide would only be spent in California.

But California would still be getting government services. California would still be protected by the United States military overseas. California would still be protected from contagious diseases by the research work that was federally funded. California would still be spending education money that came from Congress.

This, of course, would be a great deal for California. But California would not be paying its fair share. Being a member of an association means paying what is owed and obeying the rules. Being a state of the United States means that your government and citizens support the United States Constitution. Nullification meant that a state could follow the rules it wanted and ignore the rest.

But the threats of secession did not come to pass since it was an election year and the South expected Andrew Jackson to be elected. Though Jackson had supported the raising of the tariff, he was still from South Carolina, a Southern state, as opposed to the current President, John Quincy Adams, from Massachusetts.

But even with Jackson in the White House the South did not have a steadfast friend. The tariff issue rapidly mixed with the concept of nullification to became a combination so explosive that Jackson gingerly sidestepped the issue during the election and into his first term.

But Jackson was a Southerner and though he did not believe in a state’s right to nullify federal laws, he did believe that the national government should be restricted from infringing on state’s rights. He made his position clear when he vetoed a bill which would have authorized the United States to buy a portion of the stock of the Marysville and Lexington Turnpike in Kentucky. He justified his veto by stating that the federal government only had jurisdiction over transportation systems built with federal dollars, and that since only one state would benefit from the bill it was probably unconstitutional. Jackson went further. He then challenged the proponents of extending internal improvements — primarily Northern senators and representatives

— to amend the Constitution so that the definition of “internal improvements” would be definitively stated. Since there was no way the Northerners could muster the required 3/4 of the states to come up with a good definition, the matter was dropped.

Tension over the Tariff of 1828 simmered for four years. Then, in 1832, former President of the United States, John Quincy Adams, who had been elected to a seat in the United States House of Representatives, introduced what was to become known as the “Adams Bill.” Basically, the bill reduced existing tariffs and provided that all future tariffs would be limited such that all import taxes together did not equal more than the government needed to operate — about $15 million.

This the time howl of protest came from Northern representatives. The very concept of the tariff was to protect infant industries, most of them in the North, and limiting tariffs meant that new businesses would have to go head-to-head against European products on the American market with no protection from the government.

While Southerners were supportive of the concept, they were pre-occupied with a much more significant event. 1832 had been an election year and the legislature of South Carolina had become packed with nullification supporters. In November, a group of citizens, legislators and newly-elected-but-not-yet-sworn-in legislators met in a mass meeting and adopted what became known as the South Carolina Proclamation which stated that it was “unlawful for any constituted authorities of the State or the United States to enforce the payment of the duties” of the tariffs of 1828 or 1832 which the Proclamation declared to be unconstitutional.

Further, the Proclamation continued, no South Carolina court could rule on the legality of the Proclamation. Additionally, should the United States attempt to force collection of the tariff, South Carolina would “proceed to organize a separate government.” In other words, if the United States government tried to collect the tariff, South Carolina would leave the union. This was a call for succession.

President Andrew Jackson may have been a Southerner but he was also an American who strongly believed in a national government. He was not a man with whom one trifled. Three days after his annual message, he put forth his rock-hard position with regard to the South

Carolina Proclamation. Nowhere in the United States Constitution was there a shred of evidence as to the constitutionality of the Proclamation. Therefore, he requested that South Carolina turn from its course of action or the United States government would be forced to suffer the “primeval curse on man for the shedding of a brother’s blood.”

John C. Calhoun, who had been Andrew Jackson’s Vice President, had resigned several months earlier to fill a vacant seat in the South Carolina legislature. Someone asked Jackson what he would do about Calhoun if the movement toward succession continued. Jackson allegedly replied that he “would try Calhoun for treason and, if convicted, hang him as high as Haman.” Calhoun, who was then on his way back to Washington D. C. to take his seat in the United States Senate after the vacancy had been filled, reported to his autobiographer years later that he had been mobbed all the way to Washington by people who wanted to see the man that was about to be hanged for treason.

Jackson, the masterful politician, had graciously left the legislature of South Carolina an

“honorable out.” The new legislature could meet and refuse to adopt the South Carolina Proclamation using as the excuse that the United States Army was larger than the South Carolina militia and to press forward with nullification would have meant death for hundreds of South Carolinians.

But South Carolina was looking for a fight. Not only did they refuse to back away from nullification, but the legislature met and passed the nullification ordinance. Then the Governor of South Carolina called for 2,000 volunteers for immediate service and another 10,000 men for a state guard.

Jackson, not a man to take any threat idly, matched the Governor actions. He immediately went to Congress and asked for the power to force South Carolina to obey the laws of the United States — as well as a reduction of the tariff. While Adams had been in favor of reducing the tariff prior to the South Carolina Proclamation, now he was unwilling to push for a reduction unless South Carolina desisted from its treasonous ways. Adams, a masterful politician in his own right, clearly did not want it to appear that the federal government was giving in to the threats of a cantankerous state legislature.

Several tariff bills were introduced, none of which were satisfactory. There was a lot of talk but nothing happened until Henry Clay and John C. Calhoun, both Southerners, forged a compromise bill. The legislation, created in secret, would reduce the tariff by a certain percentage per year until a net 20 percent reduction had been achieved. The legislation was kept secret until it was sprung on the House of Representatives just as everyone was leaving for the night. Quite a few Northern representatives had already left for the night and those who remained protested bitterly and asked for a delay. The request was refused and, because the Southerners in the House had done their counting well, the bill passed. A similar bill swept through the Senate.

Thus Jackson had a portion of his request. The second portion, known as the “Force Bill,” was the funding for troops to enforce the right of the federal government to lay and collect taxes — specifically in South Carolina. Debate was rancorous. But history was in the making in the Senate: John C. Calhoun was debating another giant of American statesmanship, Daniel Webster. Word passed quickly through the Capitol, and Washington D. C. for that matter, and the Senate gallery was “crowded to suffocation.” Even the House adjourned so that its members could watch the debate.

The spectators were not disappointed. For his part, Calhoun’s argument was eloquent. But Webster was magnificent. He rose from his seat at five in the afternoon and spoke for three hours.

When the vote on the Force Bill came to floor, the Southerners did not have enough votes to stop the bill. So they left the chambers rather than vote. Henry Clay, unwilling to sacrifice his continuing hope to be President of the United States, did not want to upset Southern voters by staying or Northern voters by leaving. He left, he claimed, because the Senate had “bad air.” As a result of the walkout, Jackson’s Force Bill passed 32 to 1. The lone dissenting vote was cast by John Tyler, later President of the United States upon the death of William Henry Harrison in 1841.

The effect was devastating. The threat of armed force by the federal government — along with squabbling within their own ranks — cooled the ardor of the South Carolina nullification crowd. Jackson was sworn into office for his second term two days after Webster’s sterling performance on the Senate floor and it was crystal clear that Jackson fully intended to keep his word and use force of arms to enforce federal law. As a result, the nullification movement disintegrated. On March 11, South Carolina stepped back from nullification and repealed the laws which it had recently passed supporting the concept.

ECONOMIC ANALYSIS OF THE “TARIFF OF ABOMINATION” AND NULLIFICATION

The bottom line in any question of business is simply who is paying for what and who is getting more for their money. The root cause of the South Carolina Proclamation was the Southerners felt they were being bled dry by Northern industrialist. As tariffs went up, the South paid the bills while the North received the economic benefit. Then, when internal improvements such as roads, bridges, and docks were constructed, they were primarily in the North or Middle States.

From the point of view of the North, the South did not need the transportation infrastructure. The South had rivers that could be used as corridors to enable their products to reach the seacoast. Roads in the South were inexpensive to build because the land was flat. Canals weren’t necessary and a railway was not a matter of economic life or death for the agricultural region. These divergent points of view did not offer common ground for compromise. As a result, the South truly believed that the North was stealing them blind with tariffs. The North was convinced that Southerners didn’t understand that the profit they received for cotton came from an international community of which the North was a major player. As the South Carolina Proclamation illustrated, neither side was willing to compromise. President Andrew Jackson may have been able to quell the Nullification Movement in 1832 but, in reality, the conflict in philosophy between the North and the South continued for the next 30 years, until the Civil War erupted.

Perhaps the most important economic lesson from the nullification fight is a government cannot adjust economics with politics. As an illustration, consider economics like the current in a river. No one can see the current. All one can see are the effects of the current, water rushing in one direction, leaves spinning as they float downstream, steep canyon walls gnawed by eons of silt and sand, and the effect of stepping into a watershed and feeling the force of the water. But none of these, individually or combined, are the “current.”

Economics, like the current, flows in a certain direction because that is its natural inclination. It will change its course for a specific, concrete reason but politics is not one of those reasons. Just as the United States Congress cannot make all rivers in America run uphill, it cannot adjust economic laws for political purposes.

The South Carolina Proclamation is an example of trying to adjust economics for political reasons. Just because residents of South Carolina believed that the tariff was unfair did not mean that this was true. The revenue from the tariff did more than build internal improvements. It also funded a military that protected the South — as in the War of 1812 — and funded a Navy which protected American shipping — quite a bit of that being cotton from the South.

[This chapter is from Steven Levi’s ECONOMIC HISTORY OF THE UNITED STATES available on Kindle.]