Hamilton's Report on Manufactures and the conservative case for tariffs

Whenever a President of the United States raises a tariff, the commentators discover that there is a war inside the conservative movement. Free traders recoil. Tariff conservatives cheer. Each side believes the other has abandoned the Founders. Both sides are wrong about that, because the Founders were on both sides.

The fight is older than the Constitution's ink. In 1776, Adam Smith published a book arguing that nations grow rich by trading freely. In 1791, the first Secretary of the Treasury of the United States sent Congress a long report arguing that this nation could not afford to follow his advice. The man was Alexander Hamilton. The document was the Report on the Subject of Manufactures, delivered to the House of Representatives in December 1791, and every conservative who has ever argued for a protective duty has been quoting it, knowingly or not.

I intend to read it closely, set it against Smith and against the text of the Constitution, and then tell you something the tariff enthusiasts usually leave out: Congress largely turned it down. Then I will give the free-trade conservatives their reply, in full, and say where I come out.

The occasion

Hamilton did not write the report because he felt like it. In January 1790 the House of Representatives directed the Secretary of the Treasury to prepare a plan for encouraging and promoting manufactures, with an eye to making the country independent of foreign nations for military and other essential supplies. Hamilton spent most of two years on it. He delivered it on December 5, 1791.

It is the last of his three great state papers. The first two were the report on public credit of 1790, which I described in Hamilton's 1790 Report on Public Credit and what honest borrowing requires, and the proposal for a national bank. Together they were a program: pay the debt, create a stable currency, and build an industrial base. The third was the one the Congress liked least.

What the report says

The report is long, and I will not summarize every page. The central argument runs in five steps.

1. The case against the "agriculture only" view. Many Americans believed that the United States should remain a nation of farmers and import its manufactures from Europe in exchange for its crops. Hamilton set out to answer them. He argued that agriculture itself would prosper more with a domestic market than with a foreign one, because European demand for American crops was uncertain and subject to the wars and restrictions of other governments.

1. Manufacturing multiplies productive labour. Hamilton listed the ways that manufacturing raises a nation's output: the division of labour, the use of machinery, the employment of people who would otherwise be idle, the attraction of immigrants with skills, and a wider field for talents and enterprise. A nation with a variety of occupations, he said, gives every kind of ability a place to work.

1. Independence is a matter of national security. A country that depends on foreign suppliers for the goods it needs in war is not fully independent. Hamilton's report opens by saying that its aim is to render the United States independent of foreign nations for military and other essential supplies. This is the argument tariff conservatives make most often today, and it is the one with the longest pedigree.

1. A young industry cannot compete against an old one. Hamilton's best-known economic point is that the established manufacturers of Europe had advantages of capital, skill, scale and government support, and that a new industry in America, left alone, would be strangled in the cradle. Temporary protection would let it grow to the point where it could stand on its own. Later economists called this the "infant industry" argument, and the report does speak of "infant manufactures" and the "conductor of an infant manufacture."

1. The tools. Hamilton proposed protective duties on imported goods that competed with American-made ones, prohibition of the export of raw materials the new industries needed, exemptions or low duties on the raw materials themselves, premiums and bounties to encourage production, and encouragement of invention. He called pecuniary bounties "in some views the best" of the means of encouragement, partly because a bounty avoids the temporary rise in price that comes with protecting duties, or produces it to a lesser degree. Notice that he did not demand that the nation wall itself off. He proposed selected duties and selected aid, adjusted to particular industries.

He also took up the constitutional question, the one that constitutionalist readers always ask first. Hamilton argued that the power to tax and spend for "the general Welfare" was an independent grant, broad and not confined to the other enumerated powers, and that Congress could therefore offer bounties for manufactures. That is the same reading of the clause that I discussed in Madison and Hamilton Fought Over Two Words, General Welfare, and We Still Pay, and it is the reading that Madison rejected.

The report also treated manufacturing as a collective effort. Hamilton was the force behind the Society for Establishing Useful Manufactures, founded in 1791, which planned an industrial town at the Great Falls of the Passaic River in New Jersey. The town was Paterson.

The text of the Constitution

Now measure the report against the document, as a constitutionalist must. Article I, Section 8, Clause 1 reads:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States

Clause 3 gives Congress the power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."

Three points follow from the text.

First, the tariff power belongs to Congress. It is a power over duties and imports and it sits in Article I, with the taxing power. The Constitution does not assign it to the President. I take that up in Who can raise tariffs? Article I, Section 232 and the delegated power.

Second, duties must be uniform throughout the United States. Congress may not favour one port over another. The duty on a good at Boston must be the duty at Charleston.

Third, the Constitution contains nothing that limits a duty to the purpose of raising revenue. Article I, Section 9, Clause 5 forbids a duty on exports, but says nothing against a duty on imports intended to protect a domestic industry. The First Congress in fact passed the Tariff Act of 1789, one of the first laws of the new government, approved on July 4, 1789, and its preamble gave three purposes: the support of government, the discharge of the debts of the United States, and "the encouragement and protection of manufactures." A tariff for protection was in the Constitution's first year of operation.

So the claim that protective tariffs are unconstitutional is not a claim the text supports. The question is whether they are wise, which is a different matter.

Adam Smith's answer, 1776

Fifteen years before Hamilton's report, Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations. His argument against protection was that a nation grows rich by allowing its people to buy where goods are cheapest. In Book IV he wrote that it is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. Restrictions on imports, Smith argued, direct capital into industries that are less productive than those it would otherwise have entered, and the consumer pays for the difference. He also wrote that an individual who prefers domestic to foreign industry for his own security and gain is "led by an invisible hand" to promote an end that was no part of his intention, which is why he trusted individual choice over government direction.

But Smith was not the absolutist that his modern admirers sometimes make him. He made an exception for national defence. In discussing the Navigation Acts, which restricted foreign shipping, he wrote that "defence ... is of much more importance than opulence." He thought that, whatever they cost in wealth, the Navigation Acts were "perhaps, the wisest of all the commercial regulations of England," because they kept up the supply of sailors and ships. And he allowed that there may be good policy in retaliating against another country's high duties or prohibitions when there is a probability that retaliation will procure their repeal.

So Hamilton and Smith are not exact opposites. They agree that the defence of the nation can justify a departure from free trade. They disagree about how far the exception stretches. Smith's exception is narrow. Hamilton's is wide, covering any industry that a nation needs for its strength and diversity.

What Congress did with it

Here is the part that gets skipped. The report did not become law. Congress received it, discussed it, and for the most part declined to act on its main proposals. There was no system of general bounties, no board of the kind Hamilton had in mind, and no sweeping program. Congress did raise duties on a range of imported goods in 1792, including steel and nails, in an act whose stated purpose was raising money for the protection of the frontiers, but it did not adopt the report's wider program. The opposition came from those with no taste for an industrial state that favored the Northern merchants and manufacturers over the Southern and Western farmer.

That fact matters for how conservatives should read the document. It is a founding argument, not a founding settlement. The very first generation of Americans heard the case for protection, from the most capable Treasury Secretary the country has ever had, and the elected branch said, in effect, not yet and not like that. Later Congresses revisited the question again and again: tariffs rose after the War of 1812 and with the Tariff of 1816, were fought over bitterly in the 1820s, and reached the notorious rates of 1828, which I recounted in The Tariff of 1828 Was So Hated Its Enemies Called It the Tariff of Abominations. Henry Clay's "American System" and the early Republican Party later built on Hamilton's ideas. The tariff question has never been settled; it has been re-argued in every generation.

The free-trade conservatives' reply

I promised to give this side a full hearing, and it is a strong one. Here is how a free-trade conservative would answer Hamilton, in four points.

1. Protection raises prices for everyone. A tariff is a tax on the consumer. The American family pays more for the protected good, and the extra money goes partly to the government and partly to the protected producer. Because there are far more consumers than producers, the cost is spread thin and the benefit is concentrated, which is exactly what makes a protected industry fight so hard to keep its protection.

1. Infant industries rarely grow up. The theory says protection is temporary. The record says a protected industry develops a political interest in staying protected, and the temporary measure becomes permanent. Once the producer is comfortable, the incentive to improve weakens. I described the logic of how the beneficiaries organize in big companies love the regulations their small rivals cannot afford.

1. Government is a poor picker of winners. Hamilton proposed that the national government select the industries that deserve help. But the government is run by politicians, who respond to the best-organized lobby and not to the best prospect. The conservative suspicion of central planning applies to industrial policy as much as to any other kind.

1. Trade makes us richer even when the other side is better at everything. The principle of comparative advantage, set out by David Ricardo in 1817, says that what matters is the opportunity cost. I explained it step by step in Comparative advantage explained with Ricardo's wine and English cloth. A country that specializes in what it does best and trades for the rest ends up with more of both.

These are not frivolous points. They are the reason that most economists in both parties have defended trade for two hundred years.

What the tariff conservatives get right

And yet I would not dismiss Hamilton. Three of his arguments have lasting force, and they are the ones that conservatives who favor tariffs today rely on.

• National security is a real exception. Smith agreed. A country that cannot make its own munitions, medicines or critical components in a crisis is not wholly sovereign. How far that reaches is the hard question, but nobody serious says it reaches nowhere.
• Capital and skill do not move as freely as the textbooks say. A factory town that loses its factory does not instantly turn into a software town. The people stay, and the community pays. I looked at that in The China shock was real, and what free traders and tariff hawks each get right.
• A nation is more than a market. Conservatives defend the family, the community and the nation as living things that a price tag cannot capture. A policy that favours the cheapest price over the town's survival has made a value judgment, and the voters are entitled to challenge it.

Where I come out

I would put it like this. Hamilton was right that the United States should not leave its security to foreign suppliers, and right that a government may use its Article I powers to encourage industries the nation needs. He was wrong, I think, to assume that a Congress would apply such powers with the discipline his own plan required: selected, temporary, limited and open. The danger of a broad protective power is not that Hamilton would use it badly. It is that his successors would use it for whoever had the loudest lobbyist.

The right conservative approach is to start with the text, which gives Congress the power; to insist that Congress and not the executive exercise it; to confine protection to narrow, well-defined national-security purposes with an end date; and to put the burden of proof on those who want to tax American consumers. The family that pays the tariff should be told what it is getting for the money. You can read the Constitution's text for yourself on the Constitution page and meet the men who wrote it on the founders page.

The case in brief

1. Alexander Hamilton's Report on Manufactures, delivered in December 1791, argued for protective duties, bounties and aid to build industry and make the country independent in war.
2. Article I, Section 8 gives Congress the power over duties, subject to uniformity, and the First Congress's Tariff Act of 1789 named the protection of manufactures as one of its purposes, so protective tariffs are constitutional.
3. Adam Smith's 1776 case for free trade admitted an exception for national defence, so the real dispute is how wide the exception runs.
4. Congress largely declined to adopt Hamilton's program in the 1790s, which shows that the tariff question was contested from the start and is not a settled Founding doctrine.
5. Free-trade conservatives are right about consumer costs, permanent protection and the poor record of picking winners; tariff conservatives are right about national security and the limits of mobility, and a sound policy takes both seriously.

What you can do: read Article I, Section 8 on the Constitution page, then write to your representative and ask whether tariff authority should stay with Congress or be shared with the President.