How Tariffs Foster Monopolies

Tariffs were the primary source of federal government revenues in the nineteenth century. Those that were higher than necessary to fund the government were generally termed Protective Tariffs because they were intended to protect domestic manufacturers from more economical producers overseas. As the center of an emerging industrial empire, the Northern states normally favored protective tariffs.

In contrast, Civil War historians generally cite three reasons why the South opposed protective tariffs and why they were outlawed in the Confederate constitution.  First, the duties inflated the cost of consumer items that might otherwise be imported at lower prices. Second, since the South’s was an export economy a high tariff wall made it difficult for overseas buyers of American exports to generate the exchange credits needed to buy such exports. Third, the South had few manufacturing plants that would benefit from such tariffs.

Many, perhaps most historians of the era, fail to cite another reason the South opposed high tariffs because it only became obvious later in the nineteenth century. Specifically, high tariffs are a prime source of monopolies.

Many students of the Civil War and Reconstruction fail to appreciate the connection between protective tariffs and monopolies because industrial trusts did not become a familiar part of the business landscape until the last quarter of the nineteenth century. In reality, however, Southern Reconstruction extended far beyond the conventionally accepted terminal year of 1877. The first federal response to monopolies was the 1890 Sherman Antitrust Act. Unfortunately, the act targeted only the apparatus of monopoly instead of the cause. Nine years later the president of the American Sugar Refining Company, which controlled 98% of its market, admitted in testimony to an industrial commission:

The mother of all trusts is the customs tariff bill…

[Production economies of scale]…in the same line of business are a great incentive to [trust] formation, but these bear a very insignificant proportion to the advantages granted in the way of protection under the customs tariff…

The tariff bill clutches the people by the throat, and then the governors and attorneys-general of the several States take action, not against the cause but against the machinery…[used]…to rifle the public’s pocket…It is the Government through its tariff laws, which plunders the people, and the trusts…are merely the machinery for doing it.

The monopolistic consequences of tariffs have been obfuscated over the years by the political rhetoric of those who favor them. Nonetheless, the danger was recognized in the U. S. Constitution when the founders outlawed tariffs between the states. Other things being equal, the smaller the territory protected by a tariff the more readily competitors inside the tariff wall will combine to regulate prices. Thus, to understand how tariffs foster monopolies consider the hypothetical result if tiny Rhode Island were to build a tariff wall against the other states.

Table 1

If Rhode Island adopted a steep tariff on lumber, the state’s sawmills would soon start charging higher prices than mills in Connecticut and Massachusetts. Lumber would cease to be available in Rhode Island at prices lower than it could be imported from neighboring states, even though Rhode Island lumber yards would theoretically be competing with one another. Basically, the adoption of a tariff would be an invitation to the state’s sawmills to raise prices. Moreover, the yards could hardly be blamed for deciding to consolidate their operations into a single trust. Although the state’s tariff would lift selling prices it would not increase production costs. Thus, if they produce more lumber than Rhode Island residents need, the mills would seek to sell the excess to buyers in neighboring states. If sawmill operating costs in Rhode Island are similar to those in Connecticut and Massachusetts, the state’s mills could sell to customers in nearby states at a lower price than in Rhode Island and still earn a profit. The ability to sell output profitably at lower prices outside a tariff wall than inside it is a telltale monopoly characteristic.

Rhode Island consumers and workers would be the losers. Yet the workers might be deceptively enlisted to support tariffs by offering them wages that are higher than in Massachusetts and Connecticut. As long as the higher wages do not absorb the entire excess tariff profits, Rhode Island’s sawmills could continue to sell profitably into Massachusetts and Connecticut at lower prices. It’s wicked. But on a national scale it basically describes Republican Party dogma well into the twentieth century. Rhode Island Senator Nelson Aldrich was a leading proponent.

Although the hypothetical tariff wall is unfair to Rhode Island consumers and workers it is a greater injustice to the state’s producers of goods that are sold primarily to other states. Even if granted an import tariff, such producers and their workers would benefit little since their domestic market is small compared to their export market.

Consider, for example, if Rhode Island were a leading manufacturer of jute bags used for bagging cotton. Since no cotton is grown in Rhode Island the market is elsewhere. No tariff wall around the state on their product can benefit jute bag makers. Yet the jute bag workers need to work just as hard as the sawmill workers to earn a living. The only difference is that the bag workers get paid less. Due to their reliance on cotton and other export commodities, such was basically the situation in the Southern states on an international scale well into the twentieth century.

Tariffs breed monopolies like Florida swamps breed mosquitoes. In 1904 John Moody’s The Truth About Trusts listed almost 320 trusts. All but about 20 were protected by tariffs. The biggest, United States Steel, was formed with the deliberate intent to suppress competition and restrain trade. Even though steel could be produced at the time more cheaply in America than in other countries, U. S. Steel sold products overseas at lower prices than domestically. The differential averaged about $10 – $20 per long ton. Wire nails, for example, which sold domestically for $2 per hundredweight, were priced at $1.55 in Britain. The beneficiaries were the steel trust and its ecosystem, which included its workers. Even though the company had relatively minor steel operations in the South, the Birmingham Differential and discriminatory railroad freight rates intentionally penalized the region.

As the table above illustrates, U. S. tariffs averaged about 45% of the value of dutiable items from the end of the Civil War until Democrat Woodrow Wilson became President in 1913. During Wilson’s two administrations the average rate dropped below 30%. Rates returned to about 45% after the Republicans regained the White House during the Roaring Twenties. They began to drop during the Great Depression when Franklin Roosevelt was President but did not reach negligible levels until after World War II. By that time American manufacturers, which were mostly in Northern states, had little to fear from overseas competition owing to the wartime destruction of European and Asian economies.

Yankees only became free trade advocates after World War II when their industries had a near monopoly on worldwide production due to wartime destruction elsewhere.

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My Civil War Books

The Confederacy at Flood Tide
Lee’s Lost Dispatch and Other Civil War Controversies
Trading With the Enemy
Co. Aytch: Illustrated and Annotated

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One thought on “How Tariffs Foster Monopolies

  1. Pingback: Leading Historian Cannot Connect the Dots | Civil War Chat

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