Some Aspects of the Tariff Question

With the decade 1890-1900, however, and more particularly with the years 1895 and 1896, a change set in. The lines on the chart came together. The American price fell to the level of the British. For a time it even fell appreciably below the British level. In no year since 1895 has it been appreciably above it. Taking the period since 1895 as a whole, the American price has been virtually the same as the British. It has been very steady,—so steady as to point to an agreement of some sort for the maintenance of a price. But, though there may thus be evidence of a combination or trust, the price situation no longer shows any influence of the tariff. Here again the protectionist will point with pride, and this time with pride more clearly justified. The object of protection to young industries,—the ultimate fall in price to the foreign level,—seems to have been attained.

The same general trend would appear on a chart showing the course of pig-iron prices during the same forty years. Such a chart would be less simple, and would need more explanation, than that for steel rails. Grades of pig-iron differ in the two countries; continuous price figures for the significant grades are not easily secured for the entire period; and allowance has to be made for differences of quality. For these reasons, the graphic presentation is most striking in the case of steel rails, whose quality is as homogeneous as can be the case with any commodity and whose prices are on record from the first year of the period to the last. The course of events which thus is sharply defined for rails is typical of what has happened with almost all the cruder forms of iron and steel: extraordinary increase of domestic production; domestic prices at first higher than the foreign; continuance of imports for a while, then their cessation; reduction of the domestic price; finally, equality of price for the foreign and the American products. To repeat, the outcome seems to have been precisely that predicted by the advocates of protection to young industries. True, the term “young industries” is rarely applied to such a giant as the American iron industry. But, as has been pointed out, the contention that protection operates in the end to lower prices is simply the young industries argument in a different turn of phrase.
*18 Substantially it is this argument which has been advanced, and which seems to be verified by the actual course of events.

Further details of the changes in the iron trade are shown in the
appended tables, giving year by year the domestic product, the imports, the prices of some important grades of iron in the United States and Great Britain. It will be of service to consider not only the general sweep, but some of the details.

The iron industry is peculiarly liable to the periodic fluctuations of modern industry. Indeed, it reflects in the extreme the alternations of activity and depression between which intervene the recurring commercial crises. The explanation of this special sensitiveness is not far to seek. The periodicity of crises is closely associated with the variations in the spirit of investment. In so-called good times, new enterprises of all sorts are freely launched. In the succeeding periods of dulness, few are undertaken. But investment and fresh ventures in our modern days mean the erection of plant, tools, and machines; and these mean iron and steel. When new and ever new railways formed the main outlet for the investment of the rapidly growing accumulations of savings, it was inevitable that their construction,—rapid in the days of activity, slow and halting in those of depression,—should cause periods now of urgent demand for iron, then of glutted markets. Within the last decade or two the railway has become relatively less important in new investments; but the ever-growing use of iron and steel in buildings, ships, tools and machinery of all kinds, has caused the oscillations in the iron trade to persist. Naturally, these phenomena are accentuated in the United States, where material progress is rapid beyond comparison and where the investment of capital proceeds fast and feverishly. Hence we find that with every rising wave of enterprise and investment the price of iron rises, and its production mounts with sudden rapidity. Then comes the crisis: prices fall, production halts, and a period of depression follows, more or less long according as the conditions for revival appear later or sooner. Not infrequently, the iron industry feels a chill before the commercial storm breaks. A slackening in the launching of new enterprises naturally appears as some among the enterprises already set up begin to weaken under the test of active operation. Hence the maximum production of iron and the highest range of prices for the cycle sometimes come in the year immediately preceding the crash. In 1872-73, it is true, the largest production and the highest price came in the year of the crisis itself, in 1873. Before the disturbances of 1884 and of 1893, however, a relaxation in the rate of output and the beginning of a fall in prices are seen in advance of the general overturn. During the first decade of the present century, no such premonitory symptoms seem to have appeared. The output of pig-iron rose without a check until the crisis of 1903 set in, and even more steadily up to the great crisis of 1907.

A glance at the
tables will show, again, that during the earlier part of the period under consideration,—until about 1890,—the imports of pig-iron responded regularly to the increasing demands of the active periods, and fell as regularly during the dull times that followed. Throughout the greater part of the nineteenth century the domestic supply of iron needed to be regularly supplemented by imports; and in the years 1871-72 there was simply a somewhat increased resort to a regular foreign supply. But, as the domestic product became larger, the imports became less and less important, and, except in the years of rising speculation and investment, virtually ceased. It is true that the custom-house returns show continuous and considerable imports throughout the period. But the case is one of those where special qualities continue to be imported, giving no indication of the relation between foreign and domestic prices for the grades chiefly used. Thus in the decade 1870-80, and even later, Scotch pig-iron was imported in considerable quantities, being thought specially adapted for certain kinds of smooth castings, and so bought abroad in the face of a duty which advanced its price beyond that of domestic iron. In later years southern iron was found available for these purposes, and the importation of the Scotch brand ceased. Similarly, spiegel-eisen and ferro-manganese,—classed with the ordinary kinds of pig-iron in the custom-house returns,—continued throughout to be imported in varying quantities. These are used, in comparatively small amounts, solely for mixture with ordinary iron in the last stages of conversion into steel.
*19 Setting aside such special cases, imports practically ceased in the dull periods of 1875-78, and again in 1884-85. On the other hand, they revived, and became of considerable volume in the active years 1879-82, and again in the year 1886-87. After this latter period, however, they ceased to come in, even during the periods of activity. The year 1890, when first the American iron product exceeded that of Great Britain, marks also the end of this spasmodic competition. With that year the revolution in the iron trade of the United States was virtually accomplished, and the new stage was entered on.

During the years of activity preceding 1890—1872-73, 1879-82, 1886-87—the price of iron in the United States was at the seaboard higher than the price in Great Britain by the full amount of the duty. This much the fact of importation suffices to prove. At other times iron did not come in,—that is, only certain special qualities came in; and the American price, while higher than the foreign, was not higher by the full amount of the duty. The tables of prices amply verify these statements. In the busy years the difference between American and British prices was large enough to offset duty, freight, and other charges; and imports flowed in. In dull years the margin shrank; and imports ceased, except for the special qualities. Until 1893 the American public had to pay roundly, sometimes the full amount of the duty, sometimes less, but always a very substantial added price, for the eventual gains which might be credited to the protective system.

A precise measurement of this burden has sometimes been attempted. Following the simplest lines of reasoning, it has been argued that the total domestic production, multiplied by the rate of duty, would gauge accurately the added charge on the community.
*20 The dangers of the hasty application of deductive reasoning could not be better illustrated than by the comparison of this version of the situation with the facts. Had there been no duty on iron, the price at the seaboard would unquestionably have been lower than it was,—at times by the full amount of the duty, at other times by less. The price in the interior, say at Pittsburgh, also would probably have had a somewhat lower range; but how much lower it is impossible to say. The freight charges from the seaboard would have impeded competition from imported iron, raising the price at which it could then be supplied. The iron output west of the Alleghanies was being made more and more cheaply and sold more and more cheaply, as the years went on; and the free admission of iron, while it might have caused prices to be lower, would at no time after 1882 or 1883 have caused a decline in the heart of the country by the full amount of the duty in force. Indeed, in the latter part of this decade—1888 or 1889—the price in this region was little higher, if at all, than that at which foreign iron could have been supplied, duty free. And, further, even admitting that domestic prices were much higher than foreign, it is probable that the removal of the duty and the consequent demand on Great Britain for iron would have caused the price of British iron to go up. The level of prices would indeed have been the same in the two countries (allowing for freight and the like); but it would have been higher than the foreign level which in fact prevailed. A great increase in the demand on the British iron masters for iron, consequent on the absence of the American duty and the lessening of American product, might have raised the price in Great Britain, not only temporarily, but over the whole period. During the first decade of the period, say until the year 1880, it is not unlikely that Great Britain could have sent to the United States all the iron that would have been imported there, if free of duty, without such pressure on the British coal and iron mines as to have caused enhanced cost and permanently enhanced prices. But with the extraordinary increase in the American demand after 1880, the additional quantity could not have been supplied from Great Britain except on harder terms. The price of iron in Great Britain would have risen in face of so great an addition to the annual demand, and the common international level would have been somewhat higher than the British price was in the absence of this demand.

A different question concerns the effect of the tariff system,—still during this earlier period, until about 1890,—on the range of the periodic fluctuations. The sources of supply were narrowed. The differences between highest and lowest prices were greater than they would have been without a duty or with lower duties. When a “boom” came, the domestic iron which was on hand, or was obtainable promptly from furnaces in blast, soared in price to the importing level. The abrupt and great rise in price tempted equally abrupt and great increase in the building of new iron furnaces, with the consequence that, when the boom collapsed and the demand fell, a large supply from the increased number of furnaces was on the market, and caused prices to fall as sharply as they had been before sharply raised. This is but an illustration of a simple principle: the wider the range of the sources of supply, the greater the steadiness of prices. Fluctuations of the same general sort there would have been in any case: the price of iron in all the great countries rises and falls in sympathy with general industrial conditions. But interplay between the markets of different countries, under a system of free exchange, would have mitigated in some degree the extent of the oscillations.
*21 The extremes were made wider apart in the United States by the protective régime; and so another count is added to the indictment which its opponents may fairly bring against it.

But, to repeat, the protectionist may point with pride to the final outcome. In the end his object was attained: the industry became self-sufficing, needed no further props, eventually supplied its product as cheaply as could be done by the now fairly beaten foreigner.

The uncompromising advocate of free trade has but one reply to make: that the same result would have come about in any case. He may maintain that it is a case of
post hoc ergo propter. The protectionist assumes that his policy was necessary to bring the iron industry to maturity. No: it would have grown as fast and as far without protection. And this rejoinder is not without show of reason. To weigh its probative force, we must consider again the main factors that have led to the victorious progress of the industry.

The mode in which the great iron ore deposits of Lake Superior were utilized has already been described. The main factor which promoted their development was improved transportation, making rich natural resources available that would have been thought, a generation before, too distant for use. The cheapening in the carriage of ore and coal, however, was simply one phase,—an important one, but by no means a dominant one,—in the general cheapening of carriage by rail and water. The immense area over which free trade was permanently assured, the mechanical genius and commercial enterprise of the people, the possibilities of fortune-building through the exploitation of the great western country,—such were the impelling forces by which the means of transportation were driven to their high stage of efficiency. The protective system can claim no credit for this result. The advance appeared in the apparatus for international trade as well as in that for domestic, and in domestic trade such as would have existed without protection as well as in that fostered by protection. And this was probably the one factor which, acting in conjunction with the great natural resources, counted for most in promoting the growth of the iron industry. Through it that industry in the United States, so far from having to deal with ores of no special excellence and obdurate and limited fuel, was able to bring together unlimited supplies of both materials on easy terms and in perfect quality. How much such easy command of proper materials tells is shown by the growth of the iron manufacture in Alabama and the adjoining southern region. Here the close contiguity of coal and iron caused a great industry to develop in the face of difficult social conditions and of the competition of the strong and comparatively old industry in Pennsylvania. The cheapening of transportation gave Pennsylvania herself the equivalent of contiguous ore and coal, and was the main element in promoting the advance of her iron industry also.

Yet it must be admitted that other causes also had their effect, such as improvements at the nines and at the furnaces and iron works. At the mines, whether deep-worked or open-cut, the organization, the engineering, the machinery became better and better. The ores were systematically sampled and analyzed, their chemical and physical constitution ascertained, and the various kinds carefully assorted for different uses or mixed in the most advantageous combinations. At the iron and steel works the discoveries of applied science were before long systematically turned to account. Forty years ago the blast furnaces and iron works of the United States were behind those of Great Britain in their technology. Matters went much by rule of thumb. The ore and coal and flux were dumped into the furnace, and the product marketed as it chanced to turn out.
*22 As time went on, the American works were no longer backward in the application of the best scientific processes. The economies from production on a large scale,—these being partly from the better organization of labor, partly from better technical appliances,—probably were secured more fully in the American establishments than in European. These were improvements in the iron industry itself, such as might be with some reason ascribed to the stimulus given by protective legislation.

Here again, however, we are dealing with causes whose operation was not confined to the iron industry or the protected industries in general. In part, they were of world-wide effect. All countries shared in the advances of the arts and the triumphs of applied science. True, in our own country special industrial excellence was achieved in many directions; but not solely or peculiarly in the protected industries. American mining engineers pushed their art with signal success in coal mines and in mines for the precious metals, as well as in copper and iron mines. No more remarkable achievements were made than in electrical engineering, where a nurturing shelter from foreign competition cannot possibly be supposed to have played a part. An important cause throughout the industrial field was unquestionably the wonderful growth of technical and scientific education. The supply of intelligent and highly trained experts, to whom the management of departments and separate establishments could be intrusted with confidence, facilitated the process of consolidation and the organization on a grand scale of widely ramifying enterprises. It may be a question how far our scientific schools and institutes of technology have been successful in stirring invention and developing initiative talent. The prime essential for leadership seems to be here, as elsewhere in the intellectual world, inborn capacity. But the rapid spread and complete utilization of the best processes were greatly promoted by them. They were largely instrumental in enabling advantage to be taken of chemical, metallurgical, and mechanical improvements in the iron and steel works. Their influence showed itself no less in the railways, the great commercial and manufacturing plants, the textile works, manufacturing establishments at large. Their influence in permeating all industry with the leaven of scientific training was strengthened by the social conditions which enabled them to attract from all classes the plentiful supply of mechanical talent. Hence American industry showed not only the inventiveness and elasticity characteristic of the Yankee from early days, but that orderly and systematic utilization of applied science in which the Germans have hitherto been—perhaps still are—most successful. The rapid accumulation of ample capital still further facilitated the ready trial and bold adoption of new and better processes.

On such grounds as these it might be alleged that the iron industry would have advanced during the forty years in much the same way, protection or no protection. And yet the unbiased inquirer must hesitate before committing himself to such an unqualified statement of what would have been. Rich natural resources, business skill, improvements in transportation, widespread training in applied science, abundant and manageable labor supply,—these perhaps suffice to account for the phenomena. But would these forces have turned
in this direction so strongly and unerringly but for the shelter from foreign competition? Beyond question the protective system caused high profits to be reaped in the iron and steel establishments of the central district; and the stimulus from great gains promoted the unhesitating investment of capital on a large scale. During the decade 1880-90 the iron output in the Pittsburgh district and the rest of the central region served by the Lake Superior ores grew from comparatively modest dimensions to independent greatness. Profits were good in all these years, and were enormous during the periods of active demand in 1880-82 and 1886-87. They continued high in the large and well-provided establishments until the crash of 1893. The mounting output was the unmistakable evidence of profitable investment. Thereafter the community began to get its dividend. Prices fell in the manner already described, and the iron industry entered on its new stage. The same sort of growth would doubtless have taken place eventually, tariff or no tariff; but not so soon or on so great a scale. With a lower scale of iron prices, profits would have been lower; and possibly the progress of investment, the exploitation of the natural resources, even the advance of the technical arts, would have been less keen and unremitting.

No one can say with certainty what would have been; and the bias of the individual observer will have an effect on his estimate of probabilities. The free trader, impatient with the fallacies and superficialities of current protectionist talk, will be slow to admit that there are any kernels of truth under all this chaff. What gain has come, will seem to him a part of the ordinary course of progress. On the other hand, the firm protectionist will find in the history of the iron trade conclusive proof of brilliant success. And very possibly those economists who, being in principle neither protectionists nor free traders, seek to be guided only by the outcome in the ascertained facts of concrete industry, would render a verdict here not unfavorable to the policy of fostering “national industry.” Few persons, whether convinced protectionists or thinkers of would-be judicial spirit or plain every-day business men, will be able to resist the appeal to national pride. Mere achievement of the leading place among the world’s producers stirs a sense of triumph; just as a victory on the battlefield, even in a dubious cause, kindles the joy of conquest.

The history of the iron industry in Germany during the same period shows similar phenomena and raises almost the same questions. In 1879, when Germany turned from a system not far from complete free trade to one of protection both for manufactures and for agriculture, the iron industry was the center of attention among the manufactures. The duty on pig-iron, previously admitted free, was made 10 marks per ton, with corresponding duties on other forms of iron and steel; not a high rate of protection as things have gone in the United States, yet substantial. During the twenty years after that date, the iron industry of Germany developed in much the same way as the American: rapid increase of domestic production, virtual cessation of imports, decline of domestic prices. By the opening of the twentieth century the German industry, as has already been noted, passed that of England, so far as quantity of output goes; imports became sporadic and comparatively insignificant; exports became large and steady. The decline in prices, it is true, was checked in Germany by the Kartells in the iron trade, and showed itself to the full only during the years when these combinations were not in command of the situation. But there can be no reasonable doubt that domestic cost and competitive domestic price were brought down to a level as low as the British. Moreover, in Germany as in the United States, these results came about in unexpected ways and in consequence of technical improvements whose effect had not been foreseen. What the Bessemer process proved to be for the iron trade of the United States, the Thomas-Gilchrist (or basic) process proved for that of Germany. It made possible the utilization for steel making of the enormous iron ore deposits of Luxemburg-Lorraine, whose high phosphorus content had prevented them from being available for the Bessemer method. The basic process had just been perfected at the time when the protective tariff of 1879 was enacted; but the leading German iron master then declared that it would prove of no advantage to his country’s industry. In fact, it proved the making of that industry. Because of it, the Luxemburg ores could be carried in vast quantities, largely by water (the Wesel and Rhine), to the great coal region of the lower Rhine, which became an iron making district comparable in size and influence to that of Pittsburgh. Technical advance in the strictly converting and manufacturing processes took place in Germany at least as rapidly and effectively as in other countries. There, as in the United States, the wide application of exact scientific methods was promoted by the diffusion of technological training; while originating and inventive science progressed in a manner to command the admiration of the world. The German iron industry grew from youth to robust and energetic manhood.
*23

The argument for protection to young industries was put forward more unequivocally in Germany than in the United States. For both countries, it might indeed have been contended that the stage for nurturing protection had been of earlier date and had already been passed by 1870-80; for in both the transition from the comparatively primitive methods of charcoal iron making to the methods of the modern iron trade had been accomplished long before.
*24 None the less, there is a
prima facie case for the protectionist,—again an apparent confirmation of the validity of the young industries argument,—from the nature and extent of the industrial development during the last two decades of the nineteenth century. And yet, for Germany as well as for the United States, the same doubt may be expressed: would not all this growth have taken place in any case? Would not the basic process in Germany (perfected as it was before the duty was put on) have solved in any case the problem how to use the Luxemburg ores? In some respects the question seems to call for an affirmative answer in Germany even more than in the United States; since in Germany not only the great coal supplies but those of ore also were familiarly known, and no exploration for new resources could play a part, as in the case of our own ore deposits on Lake Superior. And would not German science, and German methodical application of science, have pursued the same forward course; would not the same spirit of victorious enterprise have led to the upbuilding of great manufacturing industries?

To such questions no certain answers can be given. It is impossible to prove which is the right solution of the economic problem. To reach anything like a well grounded conclusion would call for a consideration of all the causes of economic progress; and this in turn for a consideration of progress of every kind, intellectual, moral, political. What has brought about the extraordinary industrial advance of Germany since the war of 1870? the no less extraordinary advance of the United States since our civil war? Those whose attention is centered on the protective controversy invariably ascribe too much to this one factor. They fail to perceive that the phenomena are large and complex. I am disposed, for myself, to believe that other factors were much more important than the protective tariffs of either country; not only the other economic factors which have been described in the preceding pages as regards the United States, but all the influences of the social environment. In both countries, and especially in Germany, the spirit of industrialism and capitalism permeated the community as never before. The spirit of boldness engendered by great victorious wars may be fairly supposed to have had its part in stimulating boldness in the conquests of peace also.
*25 If it is difficult in the highest degree to measure with precision the effects of the strictly economic factors, such as the protective tariff, how much more difficult is it to gauge those of the great underlying social and spiritual forces!

Discussions like these bear on still another general topic, one which has much engaged the attention of economists: the method of investigation appropriate for their subject, and more particularly the extent to which historical and statistical inquiry can contribute to the elucidation of principles. The economists of Ricardo’s school were wont to say that a conclusion as to the effects of protection could be reached only by deductive reasoning, such as was commonly used by them. John Stuart Mill, in his statement of the method proper in the social sciences, treated this problem as a typical one, and set forth the difficulties of disentangling the effects of tariff policy from those of other forces operating on a country’s prosperity.
*26 But in our own time, Professor Schmoller has questioned the validity alike of the general theorem and of the particular example. Attentive examination of the industrial policy and history of this or that country, he maintains, may show whether or no protective duties serve to promote prosperity.
*27 Is any aid on the question of method to be got from the present inquiry as to the duties on iron in the United States?

Certainly the statistical and historical material is here as complete as it could possibly be made. The elaborate reports of the British and American Iron Associations, the publications of the Geological Survey, the detailed customs statistics, the extensive technical literature, supply information as full and detailed as the economist can hope to secure. If ever the inductive method is applicable, here is an opportunity.

The argument for protection to young industries has been considered in this volume on the assumption that the immediate effect of protection is to cause a national loss,—one measured, in the simplest case, by the volume of domestic production multiplied by the rate of duty. That loss, it has been argued, may be offset by gain at a later stage; at the outset, however, a loss there is. But as has already been noted,
*28 the stanch protectionist will deny this
in toto. There never is a loss. The community is richer from the start. True, the prices of the articles taxed may for a while be higher. But a home market springs into being at once, capital previously idle finds employment, a demand for labor is created, the rate of wages is maintained at a high level. No doubt, all such familiar disquisition will be set aside summarily by the person severely trained in economics. It belongs to the A B C of the subject; and the proper place for its discussion is the elementary class-room. No doubt, too, the reasoning on which we conclude that there is a national loss is in its essence very simple. It is but a common-sense application of the principle of the division of labor, a simple corollary from an analysis of the gains from the geographical distribution of industry, and perhaps a platitude not to be dignified as “deductive reasoning.” And yet, when we meet the protectionist on his own ground, this platitude leads to some reasoning by no means of the simplest sort. Is an additional market really created by protection? Is there employment for idle capital, or only transfer of capital previously employed? Is the rate of wages made high or kept high? The reader who has followed the voluminous economic literature which German scholarship has piled up in recent years meets not infrequently the contention in favor of
Schutz der nationalen Arbeit. Yet often he is left in doubt just how and why national labor is to be shielded by protection,—whether for preventing sudden shifts in the historically rooted industries of a slow-moving people, or for elevating the condition of labor in the whole country. Or, to take another example, it is often set forth, in the same quarters, that the burdens which the great social legislation of Germany imposes on her employers must be offset by duties on the products of competing foreign employers,—a proposition to which the stanch protectionist would unhesitatingly assent. But, if this be a good ground for compensating duties, why is not a general higher range of wages also a good ground, or any other condition unfavorable to the employer,—
e.g., high income or property taxes, or poorer natural advantages? To answer these questions, some severe reasoning is called for: plain commonsense, unsupported by sustained argument from principle, does not suffice. The most exhaustive statistical and historical inquiries, on the extent of the home market, the situation of domestic labor, the amount of the burdens on the employer, can lead us to no secure result until we have not only grasped, but followed into all its ramifications, the main conclusions concerning the effects on national prosperity of the new direction of the productive forces brought about by tariff restrictions.

Similarly, our statistical inquiry on the American iron industry can lead us directly to no conclusion on the old and perhaps stale dispute on protection and free trade. The initial question—is there a national loss because of the higher price of the dutiable article?—cannot be answered from facts and figures. So far Mill and his associates were right. The effects of protection on national prosperity cannot be discerned by examining, however laboriously and critically, the facts either as to the prosperity of the community at large or as to the growth of protected industries.

If, indeed, this much be settled,—if the conclusion here assumed with regard to the general principle be accepted,—then the next stage in the inquiry assumes a different form. Professor Schmoller has remarked that inductive and deductive reasoning are as indispensable each to the other as the right foot in walking is to the left.
*29 For the particular sort of economic problem here under consideration the analogy holds perfectly. A long step forward must first be taken by deduction alone,—that is, by reasoning from premises established through very simple observation. But thereafter both laborious digging at the facts and their critical interpretation in the light of familiar premises must proceed side by side. Even so, as has just been remarked, there may be almost insuperable difficulty in the way of reaching a firmly-grounded result. And in any case, for the settlement of the underlying questions of principle we are still compelled to rely mainly on general reasoning from simple premises.