they are least of all. When our population is so small that all our labor can be engaged in the group represented by A, wages will be at their maximum. When our population increases so that some of the labor will have to be set to work in group B, the wages of all labor must decline to the level of the productivity in that group. We will suppose that population has increased up to a point where the opportunities represented by A and B are fairly well manned, and wages are determined by the productivity of labor in B.

With wages thus determined, it is clear that no employer, without governmental aid, can afford to hire labor to exploit the opportunities represented by C and D. This would necessitate paying labor in C and D as much as it produces in B, and that by hypothesis is more than it produces in C and D.

Now let us suppose that a political party is in power which holds the belief that we should produce everything that we consume, that is, that the opportunities represented by C and D should be exploited as well as those represented by A and B. Labor may be drawn away from A and B. This involves the necessity of compensating entrepreneurs in some way for the disadvantages under which they will operate in C and D. Either wages must be reduced in A and B, or some form of subsidy must be granted to C and D.

The commodities that the industries composing C and D will produce have been hitherto, we assume, obtained from abroad. through exchange for commodities produced by A and B. The government now renders this difficult by placing high duties upon the former class of commodities. This means that producers in the groups A and B-both employers and workmen-must pay higher prices for what they buy. They do not receive higher prices for what they sell; in fact, they receive lower prices, as this, we have seen, is the effect of protective duties upon export industries. It appears, then, that part of the disadvantage of producers in C and D is removed by reducing wages in A and B.

After the duty has gone into effect and the prices of commodities that can be produced by C and D have risen sufficiently, enterprisers will be able to hire labor at the wages prevailing in A and B, and establish industries in C and D. So far as the remaining laborers in A and B buy the products of C and D, the difference between the price which they pay for those products and the price that they would pay if they were permitted to import those products duty-free is a tax paid not to the government, but to the producers in C and D, to enable the latter to remain in business. It is an uncompensated deduction from the natural earnings of the

laborers in A and B. Their wages have been reduced. Nor are the workers in C and D paid as much, estimated in purchasing power, as they would have received if they had been allowed to remain in A and B under the earlier conditions. The net effect of the imposition of the duty has been to saddle the self-supporting industries, A and B, with the support of the pauper industries, C and D. Yet the inventors of this policy have the effrontery to tell laborers in A and B that this policy is the bulwark of their high rate of wages!

The principles involved in the illustration may be stated in the following general terms: Wages in any country will be at the highest point when all the labor of that country is concentrated in the industries in which its relative advantages over other countries are greatest. If there are no protective duties whatsoever, employers will, as a rule, seek out the industries in which their country has the greatest relative advantages. Protective duties enable other industries to exist, but only through taxing the more productive industries for their support. Protection as a permanent policy means a slight reduction of money wages, and a greater reduction in wages estimated in purchasing power.

G. THE HISTORICAL SETTING OF THE CURRENT TARIFF PROBLEM

158. A Half-Century of Tariff History23

BY HARRISON S. SMALLEY

A study of the historical setting of the current tariff problem need not take us back beyond the period of the Civil War. True, the tariff had played a part in politics from the beginning, a part out of all proportion to its real importance. For the first quarter-century of our national existence the idea of protection had found but precarious foothold in our tariff schedules. However, the natural protection furnished by the Napoleonic wars had resulted in the establishment of many manufacturing industries, which had proceeded to make their presence known immediately the war was over. The result had been a series of bills granting relatively high duties from 1819 and 1824 until 1846. However, the South had opposed, and the high level of duties had, even in those days, been subject to many vicissitudes. From 1846 until the Civil War the dominant

23 Adapted from "A Short Sketch of American Tariff History," in Readings in Political Economy. Privately published (1911).

theory underlying tariff policy had been that of revenue, but protective features had not been entirely abandoned. However, as we have said, the present era properly begins with the Civil War.24

The Morrill law, passed in 1861, raised the level of duties quite substantially. Modifications in duties were constantly being made throughout the conflict, and in the end the level of duties was very greatly raised.

Although the idea of protection was quite prominent, the primary reason for the increase was the need of revenue. The government had adopted a most elaborate policy of internal taxation, including taxes on manufactured goods. It seemed just, therefore, since American producers were burdened with excise duties greatly increasing their costs of production, to protect them by a proportionally higher tariff duty. In fact, had this not been done, the government's attempt to collect revenue in many cases would have failed. Accordingly many "compensating duties" were added to the already high rates. This level was still further raised through the efforts of designing congressmen, who found it easy to secure duties for favored industries under the pretense of raising revenue.

During the war no one imagined that the excessive duties would be permanent. But the war passed, and tariffs have come and gone, but still we have a general level of duties about like that which prevailed at the end of the war. Soon after hostilities ceased Congress began to repeal the special internal revenue duties. But the compensating duties, made necessary by these, were not taken off. So today we are still paying many special duties designed to compensate manufacturers for duties which have not been levied upon them for forty years.

Several reasons may be assigned for the failure of Congress to reduce the war tariff after the close of the conflict. Its attention was largely drawn to the problems of reconstruction in comparison with which the tariff was a minor issue. Again, Southern opinion, which alone was favorable to free trade, was not strong. Furthermore, the tariff was in a state of great confusion, and its intelligent revision would have required a great deal of time and care. Still another factor of a political character was probably of considerable consequence. The Republican party had been organized as a protest against the spread of slavery. With the successful termination of the Civil War its object was accomplished. Hence it was left without a special reason for its continued existence. If the party was to remain a force in politics it must have a positive platform

Mr. Smalley is not responsible for the opening paragraph.

on which to stand. So the Republican leaders seized upon protection and made it one of their leading policies. But most important of all, the protected interests exerted in the congressional lobbies a powerful influence to prevent a reduction of duties. Indeed, from that time to this the pressure brought by protected producers upon Congress and congressmen has been the most serious obstacle in the way of tariff reform. For these reasons the war tariff level was maintained. Within a few years the popular mind became accustomed to high protection and more or less adjusted to it, and the lobbyists and representatives of protected interests found it relatively easy to secure what they wanted from Congress.

Readjustments were, of course, made; but they were more numerous than important. In 1870 under cover of certain reductions the duties were raised on a large number of articles. In 1872, because of surplus revenue, it was thought expedient to make a horizontal reduction of 10 per cent. Putting coffee and tea on the free list evidenced the determination of Congress to lower revenue rather than protective duties. In 1875 the tariff was restored to its former level. Because of a popular demand and another excess of revenue the schedules were again revised in 1883. The effort to satisfy the popular demand and at the same time to save the principle aroused considerable protest. In 1888 Cleveland came out strongly in favor of tariff reduction.

Viewing their victory at this election as a vindication of their policy, the Republicans proceeded to adopt a new tariff, the McKinley Act, which surpassed in altitude all previous achievements. How well the demand for reducing revenue without sacrificing favors was met is evidenced by their action in removing the duty on sugar, averaging 2 cents a pound, and substituting for it a bounty of 2 cents a pound on all sugar produced in this country. The popular protest was immediate. In the election of 1890 the Democrats captured the House, and won the presidency and the Senate two years later. The panic of 1893, which came while the McKinley Act was a law, and the troubles over the coinage of silver, for a time delayed revision. They also served to destroy party unity. A bill was passed by the House embodying substantial reductions. This, however, was radically amended by the Senate, the Republicans and a few bolting Democrats being responsible for the changes. The bill as passed embodied a series of duties lower than those of the McKinley bill, but substantially higher than those of the tariff of 1883. President Cleveland was so displeased that he allowed the bill to become a law without his signature.

The act failed to relieve the depression following the panic which had been caused very largely by the silver legislation of the Republicans. Perhaps no tariff bill could have mended matters. Certainly there was no threat to business in the Wilson-Gorman bill. Yet people began to blame the act for the failure of business to recover from the panic. The opportune reappearance of the silver question offered the Democrats a way of sidetracking the tariff. So, when Bryan in the national convention of 1896 made his "cross of gold" speech, he was hailed as the new leader of the party, and the free coinage of silver was declared to be the paramount issue.

Nevertheless the tariff was not by any means lost from view. The Republicans, victorious in the election of 1896, felt authorized to raise the tariff once more. In consequence they passed the Dingley law of 1897, which was a revision upward, restoring the general level of the McKinley Act.

By 1900 the Republicans had formulated an argument which proved most effective. It was: "From 1894 to 1897 we had a Democratic tariff and hard times; from 1897 to 1900 we have had a Republican tariff and prosperity." Some members of the party went so far as to attribute the panic of 1893 to the Wilson-Gorman bill which was not passed until more than a year later. It made no difference that the Democratic tariff had been a high protective measure. Nor did it make any difference that the hard times and prosperity were due to a very large number of other causes. Post hoc is propter hoc. The Democrats lacked courage to meet the issue, and attempted to use Imperialism as a shield.

By 1904 sentiment favorable to revision had again begun to appear. The rise of the trusts, the revival of the old fear of monopoly, and the knowledge that these combinations had in many cases been able to charge high prices because they were protected from foreign competition gave impetus to the movement for tariff reform. This was increased by the growing concern over the increase in the cost of living. By 1908 the sentiment was so strong that the Republicans promised that, if successful in the election, they would revise the tariff. The courage of the Democrats had returned and they demanded downward revision both in 1904 and in 1908.

The result of the Republican victory was a special session of Congress in 1909, at which the Payne-Aldrich Act was passed. This act decreased many duties but raised many others. The general level of the Dingley bill of 1897 was maintained. It permitted no compromising of the protective principle. As yet it is not evident that