(March 17, 2018) For the first 124 years of United States history from 1789 to 1913 import tariffs provided the bulk of federal tax revenue. Generally the South opposed high tariffs. Southerners wanted them strictly to raise revenue and not to be used as a tool for protecting domestic industry from more efficient overseas competition. That’s because few domestic manufacturers were located in the South and the region accounted for 80% of America’s exports at the start of the Civil War. Conversely, the North generally wanted tariffs specifically designed to insulate domestic industry from foreign competition even if the steep rates failed to increase tax revenue. That’s because most of the country’s manufacturing companies were in the North. From the Northern perspective a protective tariff was optimally successful when it failed to generate any tax revenue because that meant that zero quantities of the competitive foreign item had been imported thereby creating a monopoly for domestic producers.
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Thus, the balance of political power was held by the Western states. In the North-versus-South contest for control of the federal government, the winner would be the section that most effectively allied with the Western states. In both the antebellum and postbellum eras it was the North. Here’s how it happened.
Prior to the Civil War the Western states comprised a region commonly known as the Midwest today, plus the Pacific Coast. Normally, residents of those states opposed high tariffs because the duties increased the price of imported manufactured goods as well as those produced domestically. Consequently, Northerners agreed to back federally funded Western public works projects—then termed internal improvements—in exchange for support on tariffs to protect Northern manufacturers. The Western states agreed because they wanted federally funded canals, railroads and Great Lakes harbors. In contrast, Southerners felt that public works projects were the responsibility of the individual states by implication of the Tenth Amendment’s states’ rights doctrine.
Ultimately the antebellum protective-tariff and internal-improvement tradeoff alliance between the West and North had two consequences. First, it shifted the Midwest’s North-South axis of commerce via the Mississippi River to an East-West axis through the Great Lakes and the latitudinal canals and railroads.
After her transportation facilities had been improved, however, the West again wanted tariff reductions. In addition to disliking the higher prices for manufactured goods caused by protective tariffs, some of the region’s farmers had become major exporters during the Civil War. Like the Southerner had learned much earlier regarding cotton exports, Western grain farmers soon realized that high tariffs made it difficult for Europeans to generate the exchange credits needed to pay for American grain. Thus, high tariffs gave Europeans an incentive to buy grain from other countries to the detriment of the Western farmer.
Thus, by the 1870s Northerners needed to strike a new bargain with Westerners if tariffs were to remain high. Since the vast majority of Westerners fought on the Union side during the Civil War, Northerners agreed to support Union veterans with generous pensions from the federal government. From the Northerners’ viewpoint the pension bargain had three advantages.
First, growing pension disbursements could be used to rationalize higher tariffs. Second, the combined life expectancies of the Union veteran and his dependents implied that the agreement would last a long time. In fact, annual pension disbursements did not peak until 1921 and did not end completely until 2016. In 1893 alone they represented forty-percent of the federal budget. By 1950 cumulative disbursements totaled $8 billion, which was three times the cost of the war on the Union side. Third, although Confederate veterans would not receive any federal pension they would be required to pay their share of taxes for the payments to Union veterans.
As a result, tariffs on dutiable items increased from 19% in 1861 to an average of 45% between 1865 and 1913 when President Woodrow Wilson reduced them to a low of 12%. Once Northern Republicans regained the White House in 1920 the average dutiable item rate increased to a high of 60% in 1932.