We Desperately Need Sound Money, Not Tariffs

https://mises.org/mises-wire/we-desperately-need-sound-money-not-tariffs

“The secrets of economic success are now known around the world: private ownership, legally enforceable contracts, thrift, low taxation, the free flow of capital, and the avoidance of war. Men still trust in government-controlled monetary systems [unfortunately] . . . But on the whole, people now know what makes societies rich: the free market.” —Gary North, May 22, 2002, (emphasis added)

President-elect Donald Trump is a well known champion of tariffs as a means to revive the country’s economy—not reducing them, but jacking them up. Calling tariffs “the most beautiful word in the dictionary,” he’s proposed even larger tariffs than the ones he had in his first term—“60 percent or more on China, and up to 20 percent on most goods from other countries.”

Further, “Tariff Man” has threatened American manufacturers such as John Deere with crushing tariffs if they move their manufacturing plants outside the US. It looks like his rule is: build it here or else.

It’s not obvious what effect tariffs will have on overall domestic employment. If tariffs result in consumers having less money to spend for other items they normally buy, it will tend to depress sales and employment in those unprotected areas. A particular tariff might help auto workers in the short run but not those shopping for the cars they build. Tariffs allow government to pick winners and losers. Open competition lets people like you and me decide.

Under a regime of tariffs (channeling Bastiat), it’s as if we prefer scarcity and high prices to abundance and low prices. And, channeling Chief Justice John Marshall (but only briefly), we need to remember his opinion in the landmark case McCulloch v. Maryland (1819), in short: the power to tax is the power to destroy.

As a tax on imports tariffs might mislead some into believing they’re only harming foreigners who are trying to “dump” cheap products on US soil. But when they get high enough they can spark violence. The infamous Morrill Tariff Lincoln signed into law on March 2, 1861, further inflamed the South and led to 75,000 Union troops crossing the border of Virginia on May 24. As Frank Taussig wrote in The Tariff History of the United States, “Hardly had the Morrill tariff act been passed when Fort Sumter was fired on [on April 12]. The Civil War began.” (On Lincoln’s threat to invade the South over the tariff, see his First Inaugural Address).

James Madison’s famous quote about war being the parent of armies, debts, and taxes was in full swing. As the war developed, financial legislation soared. Taussig writes,

A huge national debt was accumulated; the mischievous expedient of an inconvertible paper currency was resorted to; a national banking system unexpectedly arose from the confusion; an enormous system of internal taxation was created; the duties on imports were vastly increased and extended.

With the Union absorbed by Reconstruction after the war, taxes regarded as impeding production were abolished, but tariffs remained unchanged. As the years passed, high tariffs “gradually became accepted as a permanent institution. . . Import duties of 40, 50, 60, even 100 percent, came to be advocated as a good thing in itself by many who, under normal circumstances, would have thought such a policy preposterous.” The Morrill Tariff of 1861, by comparison, raised the rate from a mere 19 percent to 26 percent for most items.

American farmers in the North and West saw tariffs differently. They had various grievances, but shared in the belief they were not getting their “fair share” of the national product, as Robert Higgs notes in The Transformation of the American Economy, 1865-1914.

They formed a national advocacy group called The Grange—established in 1867 and still in existence—that lobbied state legislatures and Congress for lower rail rates, among other things. They also had a “strong feeling against the tariff,” Taussig notes, that reached the ears of their Congressional representatives. With the tariff already responsible for a surplus revenue of $100 million, for which the government was buying bonds to dispose of it, achieving some degree of tariff reform was not difficult. But only to some degree.

By 1872, a reform movement led by John L. Hayes of the Wool Manufacturers Association managed to achieve a 10 percent reduction in “all manufactures of cotton, wool, iron, steel, metals in general, paper, glass, and leather”—the protected industries.

According to orthodox economic historians, Rothbard tells us in History of Money and Banking in the United States: The Colonial Era to World War II, the economy endured a depression from 1873-1879. To them this was obvious because prices fell at a rate of over one percent during this period, and falling prices signals a depression among the orthodox. Yet during this period,

Once again, we had a phenomenal expansion of American industry, production, and real output per head. Real reproducible, tangible wealth per capita rose at the decadal peak in American history in the 1880s, at 3.8 percent per annum.

With the US still on the greenback standard, the money supply grew, but not enough to overcome the great increases in productivity. Real wages, however, fell during this period, a trend we might expect with a depreciating currency.

Government Resurrects the Gold Standard

In 1875, the Grant Administration decided to resume redemption of gold at prewar value beginning on the first day of 1879. As Rothbard writes, the stage was set “for a decade of tremendous growth.” From 1879 to 1889, “while prices kept falling, wages rose 23 percent. So real wages, after taking inflation—or the lack of it—into effect, soared.” Rothbard continued,

No decade before or since produced such a sustainable rise in real wages…. And while there are many reasons why real wages increase, three necessary conditions must be present. Foremost, an absence of sustained inflation. This contributes to the second condition, a rise in savings and capital formation. People will not save if they believe their money will be worth less in the future. Finally, technological advancement is obviously important. But it is not enough. The 1970s saw this third factor present, but the absence of the first two caused real wages to fall. (emphasis added)

Conclusion

A sound monetary system is necessary to make any country great. Sound money—gold—is hoarded by central banks, and they know it’s sound or they wouldn’t hoard it. And what makes gold sound money? Quoting Mises: 

Thus the sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

And, allowing me another quote, one of my favorites, from Milton Friedman: 

If a domestic money consists of a commodity, a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself.

Mr. Trump should take aim at the institution responsible for the money we are forced to use—the Federal Reserve System—and eliminate it without delay. It is a legalized counterfeiting racket and has no place in civilized society. Let the market decide on money, both kind and quantity, not some board of bureaucrats.

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