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Lincoln’s Economic Legacies: Reality Teaches Painful Lessons

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Lincoln

Part 4

One of Henry Clay’s most powerful legacies was his influence on Abraham Lincoln. Lincoln was a loyal admirer of Henry Clay, and as the Whig leader of Illinois, called Clay “my ideal of a great man.” Unfortunately, his devotion to Clay’s American System of Economics left a wide path of unanticipated economic hindrance and destruction for many decades.

While protectionist tariffs benefit selected industries or commercial interests, they punish everybody else. The higher prices charged by protected business interests are passed on to consumers and other businesses whose purchasing power and standard of living are thus lowered. Their reduced purchasing power reduces demand for consumer products and negatively impacts employment demand.

Protectionism is particularly hard on exporters. Besides their direct effect on the cost of doing business, tariffs negatively impact the exchange rate at which exports can be exchanged for products burdened with increased tariffs. In effect, not only are the exporters’ costs at home increased, but they are also likely to get less for their product on exchange. Furthermore, exporters often face retaliatory tariffs that result in lost business and even lost markets. The Confederate Constitution outlawed protective tariffs, and the Confederate Congress set a free-trade course.

In a 2006 study using mathematical regression analysis, Douglas Irwin analyzed the impact of the 30 percent average tariff during the year 1885. He found that protected industries were not able to increase their profits by the full 30 percent because the higher prices caused by the tariff increase also increased their costs. Their net profit increase through government protection was thereby reduced to about 15 percent, which explains why they kept crying for still higher tariffs. On the other side of the coin, the tariff reduced exporter profits by about 11 percent. The total redistribution of income across commercial interests and regions was a whopping 9 percent of total GDP (Gross Domestic Product). Most consumers, however, were not directly involved in importing or exporting goods, so their economic loss was less visible, and politicians were able to favor special commercial interests with minimal impact at the polls.

Henry Clay’s strongly protectionist 1824 Tariff increased average dutiable rates from about 25 percent to 35 percent. Southern protest was so strong that the state legislatures of five of eight Southern states passed resolutions declaring it unconstitutional, and the South Carolina Legislature added that Henry Clay’s “American System” of tariffs and corporate subsidies was “a system of robbery and plunder” that “made one section tributary to another.” The 1824 Tariff resulted in painful increases in the cost of living and doing business in Southern states and severely reduced Southern export business. South Carolina’s export business dropped 25 percent over the next two years. Yet the tragic suffering imposed on the South by the 1824 Tariff was ignored by the Northern special interests that dominated Congress. Higher tariffs meant bigger profits to them.

In 1828, another tariff bill was passed, which was so overbearing and unjust that it is known in history as the Tariff of Abominations. The average dutiable rate was raised approximately 50 percent, raising the average rate to about 35 percent, the highest in history to that point. The original impetus was that Northern textile manufacturers believed they needed greater protection, but the bill became a comprehensive bribery scheme to win the votes of Middle and Western states in the presidential election. When the Tariff of 1832 did not give the South significant relief, the Nullification Crisis erupted in South Carolina. Southern reaction to the 1824, 1828, and 1832 tariffs should have been adequate warning that passing the Morrill Tariff in 1860-61 could lead to Southern secessions.

On June 17, 1930, near the beginning of the Great Depression, Congress passed the highest tariff bill in U.S. history, the Smoot-Hawley Act. President Herbert Hoover signed it reluctantly. Its stated purpose was to protect suffering American workers, farmers, and businesses from foreign competition. Until then, exporters were faring well and remained a relative strength in the economy. The House passed the bill 264 to 147, with 244 Republicans and 20 Democrats voting for it. The Senate passed it 44 to 42, with 39 Republicans and 5 Democrats voting for it. As could have been predicted by historical experience, exports soon suffered, dropping 61 percent, and even Canada introduced a retaliatory tariff against U.S. goods. Unemployment was at 7.8 percent when Smoot-Hawley passed and jumped to 16.3 percent in 1931 and peaked at 25.1 percent in 1933. Republicans had not yet learned their Free Market and Free Trade lessons. Protectionist tariffs are generally harmful to economic growth and are essentially a political means of redistributing regional and commercial wealth.

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