Tariffs & The Wisdom of Grover Cleveland

The tariff debate and controversy seems to be escalating and has been leading to tremendous stock market volatility. Whenever there is such a heated topic that catalyzes strong emotions I like to take a step back and find ways to drown out the cacophony. One of the ways I do this is to ignore today and look to history to see what I can learn from the past. Fortunately, we have a strong history of tariffs and debate about them that allows a resourceful and curious mind to find relevant historical information.

This interest in learning more took me back to the late 1880s when there was a huge debate over increasing already large import tariffs in the country. My research led me to Grover Cleveland’s state of the union address in December 1887 in which he devoted a large amount of time to this issue. I mistakenly went to his address of 1888 first but I’m glad I did because it was fascinating reading in some respects and unbelievably tedious as well even though he said with great oblivion the following::

“To secure brevity and avoid tiresome narration I shall omit many details concerning matters within Federal control which, though by no means unimportant, are more profitably discussed in departmental reports.”

He then goes on later in the address and cites some incredibly tedious statistics to convey quantitative measurements of key indicators of the country’s progress. While I admire this in a report it must have been unbearable to hear it in a speech. Here is one such example of many:

“The Secretary of the Treasury reports that during the fiscal year ended June 30, 1896, the receipts of the Government from all sources amounted to $409,475,408.78. During the same period, its expenditures were $434,678,654.48, the excess of expenditures over receipts thus amounting to $25,203,245.70. The ordinary expenditures during the year were $4,015,852.21 less than during the preceding fiscal year. Of the receipts mentioned, there was derived from customs the sum of $160,021,751.67 and from internal revenue $146,830,615.66. The receipts from customs show an increase of $7,863,134.22 over those from the same source for the fiscal year ended June 30, 1895, and the receipts from internal revenue an increase of $3,584,537.91.”

And while his focus on statistical minutia was overwhelming there was the occasional nugget which bubbled to the surface. For example, here is some interesting information about immigration, which is obviously still a very heated topic today.

“Including all the immigrants arriving who were over 14 years of age, 28.63 per cent were illiterate, as against 20.37 per cent of those of that age arriving during the preceding fiscal year. The number of immigrants over 14 years old, the countries from which they came, and the percentage of illiterates among them were as follows: Italy, 57,515, with 54.59 per cent; Ireland, 37,496, with 7 per cent; Russia, 35,188, with 41.14 per cent; Austria-Hungary and provinces, 57,053, with 38.92 per cent; Germany, 25,334, with 2.96 per cent; Sweden, 18,821, with 1.16 per cent; while from Portugal there came 2,067, of whom 77.69 per cent were illiterate.”

I guess if Donald Trump were president back then he would have said why can’t we have more people from Sweden (versus Norway today) instead of getting people from those “&@*le countries” like Italy, Russia, Austria-Hungary, and Portugal. I digress.

Cleveland was the only president who served two terms that were not consecutive (1885-88 and 1893-96). He was only one of two Democrats to be elected president between 1861 and 1933. Unfortunately for him, his second term was marred by the panic of 1893 so he was not judged so well at the time. Upon further reflection, however, historians have been more kind to him and I can see why. He was very ethical, he went after corruption, he believed in a strong balance between private initiative and rewards and government involvement, he had a great command of details (perhaps too much), and was against protectionism which, ironically, became more of the thinking of William McKinley after he became president and cut tariffs despite having been such an advocate of tariffs such that the new legislation was called the McKinley Tariff.

At the time Cleveland was president tariffs were a big source of government revenue so there was concern that lowering them would impact the fiscal situation of the government. Cleveland dismissed this concern because not only did he feel that tariffs caused more harm than good, but because the government was running too large of a surplus and it was taking too much money out of the economy and harming economic output. Cleveland was far ahead of his time in pointing out the huge differences between a sovereign running a deficit as compared to individuals, businesses, and families. This is what he said one year earlier in December 1887:

I believe our present tariff law, if allowed a fair opportunity, will in the near future yield a revenue which, with reasonably economical expenditures, will overcome all deficiencies. In the meantime no deficit that has occurred or may occur need excite or disturb us. To meet any such deficit we have in the Treasury in addition to a gold reserve of one hundred millions a surplus of more than $128,000,000 applicable to the payment of the expenses of the Government, and which must, unless expended for that purpose, remain a useless hoard, or, if not extravagantly wasted, must in any event be perverted from the purpose of its exaction from our people. The payment, therefore, of any deficiency in the revenue from this fund is nothing more than its proper and legitimate use.

Cleveland is correctly pointing out that the government should not take more money out of the economy when it already has huge reserves to cover all necessary expenditures and any emergencies. The build-up of such a war chest can create the potential for a terrible misallocation of capital and create big economic problems as demand is withdrawn from the economy due to excessive taxation. He then goes on to point out some of the key differences between governments and individuals when it comes to deficits.

The Government thus applying a surplus fortunately in its Treasury to the payment of expenses not met by its current revenues is not at all to be likened to a man living beyond his income and thus incurring debt or encroaching on his principal.

It is not one of the functions of our Government to accumulate and make additions to a fund not needed for immediate expenditure. With individuals it is the chief object of struggle and effort. The application of an accumulated fund by the Government to the payment of its running expenses is a duty. An individual living beyond his income and embarrassing himself with debt or drawing upon his accumulated fund of principal is either unfortunate or improvident. The distinction is between a government charged with the duty of expending for the benefit of the people and for proper purposes all the money it receives from any source, and the individual, who is expected to manifest a natural desire to avoid debt or to accumulate as much as possible and to live within the income derived from such accumulations, to the end that they may be increased or at least remain unimpaired for the future use and enjoyment of himself or the objects of his love and affection who may survive him.

It is immeasurably better to appropriate our surplus to the payment of justifiable expenses than to allow it to become an invitation to reckless appropriations and extravagant expenditures.

I suppose it will not be denied that under the present law our people obtain the necessaries of a comfortable existence at a cheaper rate than formerly. This is a matter of supreme importance, since it is the palpable duty of every just government to make the burdens of taxation as light as possible. The people should not be required to relinquish this privilege of cheaper living except under the stress of their Government’s necessity made plainly manifest.

Cleveland is pointing out that government is not nearly as revenue constrained as individuals and businesses and has a duty to wisely spend and/or invest its surplus and not build up a war chest of reserves that can invite the misallocation of it by empire builders.

The Democrats lost control of Congress and in 1890 it was the Republicans who implemented The Tariff Act of 1890, commonly called the McKinley Tariff. It raised the duty on imports by an average of 50%. I think it is instructive to quote liberally from Cleveland’s state of the union address which he devotes heavily to the issue of tariffs. In many ways, these arguments can be applied to China today as their position in the world and stage of development have some similarities to the United States in the 1880s and 90s. It also offers great lessons for us today as we should not forget that when specific industries are protected it may be beneficial to those industries in the short run, but it creates less of an incentive to innovate and often hurts the rest of the country. Workers theoretically benefitting from tariffs are also consumers too so we should not forget that as Cleveland points out.

[A]nd yet with slight reflection they will not overlook the fact that they are consumers with the rest; that they too have their own wants and those of their families to supply from their earnings, and that the price of the necessaries of life, as well as the amount of their wages, will regulate the measure of their welfare and comfort.

Nor can the worker in manufactures fail to understand that while a high tariff is claimed to be necessary to allow the payment of remunerative wages, it certainly results in a very large increase in the price of nearly all sorts of manufactures, which, in almost countless forms, he needs for the use of himself and his family. He receives at the desk of his employer his wages, and perhaps before he reaches his home is obliged, in a purchase for family use of an article which embraces his own labor, to return in the payment of the increase in price which the tariff permits the hard-earned compensation of many days of toil.

And the farmer is hurt also by higher prices.

The farmer and the agriculturist, who manufacture nothing, but who pay the increased price which the tariff imposes upon every agricultural implement, upon all he wears, and upon all he uses and owns, except the increase of his flocks and herds and such things as his husbandry produces from the soil, is invited to aid in maintaining the present situation; and he is told that a high duty on imported wool is necessary for the benefit of those who have sheep to shear, in order that the price of their wool may be increased. They, of course, are not reminded that the farmer who has no sheep is by this scheme obliged, in his purchases of clothing and woolen goods, to pay a tribute to his fellow-farmer as well as to the manufacturer and merchant, nor is any mention made of the fact that the sheep owners themselves and their households must wear clothing and use other articles manufactured from the wool they sell at tariff prices, and thus as consumers must return their share of this increased price to the tradesman.

He then goes on to use a quantitative example of the harm tariffs do. Don’t forget that this is during a state of the union address. Imagine being in the audience for this.

I think it may be fairly assumed that a large proportion of the sheep owned by the farmers throughout the country are found in small flocks, numbering from twenty-five to fifty. The duty on the grade of imported wool which these sheep yield is 10 cents each pound if of the value of 30 cents or less and 12 cents if of the value of more than 30 cents. If the liberal estimate of 6 pounds be allowed for each fleece, the duty thereon would be 60 or 72 cents; and this may be taken as the utmost enhancement of its price to the farmer by reason of this duty. Eighteen dollars would thus represent the increased price of the wool from twenty-five sheep and $36 that from the wool of fifty sheep; and at present values this addition would amount to about one-third of its price. If upon its sale the farmer receives this or a less tariff profit, the wool leaves his hands charged with precisely that sum, which in all its changes will adhere to it until it reaches the consumer. When manufactured into cloth and other goods and material for use, its cost is not only increased to the extent of the farmer’s tariff profit, but a further sum has been added for the benefit of the manufacturer under the operation of other tariff laws. In the meantime the day arrives when the farmer finds it necessary to purchase woolen goods and material to clothe himself and family for the winter. When he faces the tradesman for that purpose, he discovers that he is obliged not only to return in the way of increased prices his tariff profit on the wool he sold, and which then perhaps lies before him in manufactured form, but that he must add a considerable sum thereto to meet a further increase in cost caused by a tariff duty on the manufacture. Thus in the end he is aroused to the fact that he has paid upon a moderate purchase, as a result of the tariff scheme, which when he sold his wool seemed so profitable, an increase in price more than sufficient to sweep away all the tariff profit he received upon the wool he produced and sold.

He then goes on to talk about how so many more people are hurt by the higher prices caused by tariffs than those who seemingly benefit from them. And yet, when second-order effects are taken into consideration, these initial beneficiaries are also harmed.

When the number of farmers engaged in wool raising is compared with all the farmers in the country and the small proportion they bear to our population is considered; when it is made apparent that in the case of a large part of those who own sheep the benefit of the present tariff on wool is illusory; and, above all, when it must be conceded that the increase of the cost of living caused by such tariff becomes a burden upon those with moderate means and the poor, the employed and unemployed, the sick and well, and the young and old, and that it constitutes a tax which with relentless grasp is fastened upon the clothing of every man, woman, and child in the land, reasons are suggested why the removal or reduction of this duty should be included in a revision of our tariff laws.

He then goes on to make the very sophisticated argument that in the absence of powerful economic trusts that conspire to keep prices higher than would otherwise be the case, the free market often can produce prices below the highest limit allowed by tariffs. Cleveland says the following.

In speaking of the increased cost to the consumer of our home manufactures resulting from a duty laid upon imported articles of the same description, the fact is not ever looked that competition among our domestic producers sometimes has the effect of keeping the price of their products below the highest limit allowed by such duty. But it is notorious that this competition is too often strangled by combinations quite prevalent at this time, and frequently called trusts, which have for their object the regulation of the supply and price of commodities made and sold by members of the combination. The people can hardly hope for any consideration in the operation of these selfish schemes.

If, however, in the absence of such combination, a healthy and free competition reduces the price of any particular dutiable article of home production below the limit which it might otherwise reach under our tariff laws, and if with such reduced price its manufacture continues to thrive, it is entirely evident that one thing has been discovered which should be carefully scrutinized in an effort to reduce taxation.

The necessity of combination to maintain the price of any commodity to the tariff point furnishes proof that someone is willing to accept lower prices for such commodity and that such prices are remunerative; and lower prices produced by competition prove the same thing. Thus where either of these conditions exists a case would seem to be presented for an easy reduction of taxation.

I must say Grover Cleveland has really impressed me. He understood that governments should not hoard savings that came from the hard earned money of its citizens and that it had a duty to recirculate that money back into the economy. He also understood the harmful effects of tariffs on the well being of the population.

I will leave you with a cartoon from Harper’s Weekly on July 7, 1888, that shows how the wool used by the everyday American has gone up significantly in price while whiskey has not. The picture came from an interesting blog post about the McKinley Tariffs that I suggest people read to understand more of the negative effects of the tariffs on the United States.