^^ LIBRARY University of California. i > * Class '^^- V ^im k^^-?- i^ ^ r \ X ■^ --^^.^ SOCIAL QUESTIONS OF TO-DAY Edited by H. de B. Gibbins, D.Litt. M.A. THE COMMERCE OF NATIONS SOCIAL QUESTIONS OF TO-DAY Edited by H. de B. GIB BINS, D.Litt., M.A. Crown 8vo, 2s. 6d. A series of volumes upon those topics of social, economic, and industrial interest that are at the present moment foremost in the public mind. Each volume is written by an author who is an acknow- ledged authority upon the subject with which he or she deals, and who treats his or her question in a thoroughly sympathetic but impartial manner, with special reference to the historic aspect of the subject. The following Volumes of the Series are now ready, TRADE UNIONISM— NEW AND OLD. G. Howell, M.P., Author of The Conjlicts of Capital and Labour. Second Edition. PROBLEMS OF POVERTY j An Inquiry into the Industrial Condition of the Poor. J. A. HoBSON, M.A. Third Edition. THE CO.'OPERATIVE MOVEMENT OF TO-DAY. G. J. Holyoake, Author of The History of Co-operation. Second Edition. MUTUAL THRIFT, Rev. J. Frome Wilkinson, M.A., Author of The Friendly Society Movement. THE CpMMERCE OF NATIONS, C. F. Bastable, LL.D., Professor of Political Economy in the University of Dublin. Second Edition. THE ALIEN INVASION, W. H. Wilkins, B.A., Secretary to the Association for Preventing the Immigration of Destitute Aliens. THE RURAL EXODUS s Problems of Village Life. P. Anderson Graham. LAND NATIONALISATION, Harold Cox, B.A. A SHORTER WORKING.DAY, H. de B. Gibbins, D.Litt., M.A. BACK TO THE LAND. Harold E. Moore, F.S.I. TRUSTS, POOLS, AND CORNERS. J. Stephen Jeans. THE FACTORY SYSTEM. R. W. Cooke-Taylor, Author of The Modern Factory System., etc. WOMEN'S WORK, Lady Dilke, Amy Bulley, and Margaret Whitley. THE STATE AND ITS CHILDREN, Gertrude Tuckwell. MUNICIPALITIES AT WORK, Frederick Dolman. SOCIALISM AND MODERN THOUGHT, M. Kaufmann, M.A. MODERN CIVILISATION IN SOME OF ITS ECONOMIC ASPECTS, W. Cunningham, D.D. THE HOUSING OF THE WORKING.CLASSES, E. Bowmaker. THE PROBLEM OF THE UNEMPLOYED, J. A. Hobson, M.A. LIFE IN WEST LONDON, Arthur Sherwell, M.A. Second Edition. RAILWAY NATIONALIZATION. Clement Edwards. WORKHOUSES AND PAUPERISM. Louisa Twining. UNIVERSITY AND SOCIAL SETTLEMENTS. Edited by W. Reason, M.A. Other Volumes are in preparation. METHUEN & CO., 36 ESSEX STREET, W.C. THE COMMERCE OF NATIONS C. F. BAST ABLE, LL. D. PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF DUBLIN ; EXAMINER IN POLITICAL ECONOMY IN THE UNIVERSITY OF LONDON ETC., ETC. SECOND EDITION, REVISED METHUEN & CO. 36 ESSEX STREET, W.C. LONDON 1899 ,\1 \\ ^v W. H. WHITE AND CO. LTD. RIVERSIDE PRESS EDINBURGH GENERAL PREFACE TO FIRST EDITION. This book has been written in the belief that existing commercial policy and the doctrines respecting it are best explained by reference to their history. A method that has been so fruitful in all other directions of social inquiry can hardly be ineffective in this one. Thus — to give instances. The McKinley Act (p. 77) is not properly understood until it is regarded as a single step in the legislation of a century. The Sugar Bounties (pp. 173-4) take us back to the continental system and the old colonial policy; and a Customs Union of the British Empire presents difficulties only known to those who have studied the effect of the differential duties (p. 206). So it is also with plans for reciprocity. Their strongest refutation lies in the fact that they have been tried and failed (p. 196). In like manner the most effective justification of the English Free Trade system is supplied by the history of its introduc- tion (Chapter VI.). What is true of legislation applies equally to theory. Modern Protectionism should be studied in its development in order to see its connexion with ideas and sentiments unsuited for industrial civilization. Only in this way is it possible to understand how so many able and enlightened vi PREFACE. men have adopted a system that is notwithstanding injurious both to social and economical progress. One result of this mode of treatment has been to diminish the amount of space devoted to certain topics that are prominent in most works on the subject. Little is said about the Corn Law struggle, nor is the Free Trade movement regarded as if it began and ended with Cobden. A few years can after all be but one stage — a highly important one it is true — in a movement that must in its entirety occupy centuries. The absence of footnotes has prevented reference being made to the various works used ; but a general acknowledg- ment must here be given to those who have supplied so much of the material necessary for a study of the kind. C. F. BASTABLE. Tritiity College^ Dublin, November, 1891. PREFACE TO SECOND EDITION. The six years that have passed since the first edition of this book appeared are not marked by any important changes in commercial policy. England has retained her position as the great free-trade country. The other great nations of the world remain, broadly speaking, at the same level of protectionism. The most noticeable events have probably been the United States tariff measures of 1894 and 1897, though they have produced no sub- stantial alteration in the policy of that country. The adoption by Canada of preferential duties in favour of the United Kingdom is also significant as marking a new stage in English Colonial relations. All further experience amply supports the position taken up in the present work, and justifies the forecast that changes would be slow and difficult to accomplish. Beyond corrections of figures, in order to bring them up to date, and references to recent events in connection with commercial policy, no change has been made for this edition. Students who desire a fuller acquaintance with theoret- ical questions may be referred to the author's Theory of International Trade (MacMillan), which handles the abstract part of the subject at greater length. C F. Bastable. Trinity College^ Dublin^ July 2%th, 1898. CONTENTS. CHAP. PAGB I. INTRODUCTORY I II. LEADING FEATURES OF INTERNATIONAL COM- MERCE 7 III. MONEY AND INDEBTEDNESS IN FOREIGN COM- MERCE 22 ^IV. THE MERCANTILE SYSTEM ... 33 T. THE OVERTHROW OF THE MERCANTILE SYSTEM — TRANSITION TO PROTECTION 42 VL THE ENGLISH CUSTOMS SYSTEM, 1815 — 1860... 5 1 VII. THE UNITED STATES TARIFF AND COMMERCIAL POLICY 70 VIII. THE REFORM OF CONTINENTAL TARIFFS, 1815 — 1865 82 IX. EUROPEAN TARIFFS (1865 — 1 897) — THE PRO- TECTIONIST REACTION 92 X. COLONIAL AND OTHER TARIFFS I06 XI. THE MODERN PROTECTIONIST THEORY ... II 7 XII. ECONOMIC ARGUMENTS FOR PROTECTION ... I33 XIII. NON-ECONOMIC ARGUMENTS — POLITICAL AND SOCIAL PROTECTION ♦ I57 X CONTENTS. CHAP. PAGE. XIV. THE OTHER EXPEDIENTS OF PROTECTION ... 1 70 XV. THE PRACTICAL OPERATION OF PROTECTION 1 77 XVI. RECIPROCITY AND RETALIATION 1 87 XVn. COMMERCIAL FEDERATION — CONCLUSION ... 202 INDEX ^. ♦•. 213 COMMERCE OF NATIONS CHAPTER I. INTRODUCTORY. One of the most striking features of modern times is the growth of international relations of ever-increasing complexity and influence. Facilities for communication have brought about closer and more constant intercourse between the different countries of the world, leading to many unexpected results. This more intimate connexion is reflected in all the different sides of social activity. International law, that two hundred years ago was almost wholly confined to the discussion of war and its efl'ects, now contains a goodly series of chapters treating in detail of the conduct of nations during peace. It draws the bulk of its materials from the large and rapidly-growing body of treaties that regulate such matters, and form so many fresh links between the states that sign them. Literature, Science, and Art have all been ' ' ' similarly affected; their followers are engaged in keenly f ' watching the progress of their favourite pursuits in other countries, and are becoming daily more and more sensitive to any new tendency or movement in the remotest nation. 2 COMMERCE OF NATIONS. But, as might be expected, it is in the sphere of material relations that the increase in international solidarity has been most decisively marked, and can be best followed and appreciated. The barriers that in former ages impeded the free passage of men and of goods from country to country have been — it cannot unfortunately be said removed, but very much diminished; and more particularly during the last fifty years the extraordinary development and improve- ment of transport agencies both by land and sea have gone far towards obliterating the retarding effects of legislative restraints or national prejudices. So little attention is ordinarily paid to the great permanent force? that govern the changes of societies, in comparison with the interest excited by the uncertain action of minor disturbing causes, that it is eminently desirable to emphasize as strongly as possible this continuous increase of international dealings. In spite of temporary checks and drawbacks, the broad fact stands out beyond dispute, that the transfer of human beings from country to country which is known as " migration," as also the similar movement of goods described as "com- merce,'' is not merely expanding, but, if periods sufficiently lengthy for fair comparison are taken, expanding at an accelerated rate. We are happily enabled to form a conception of the extent of this latter movement with a degree of accuracy that is quite impossible in respect to other sides of social life. The growth of peaceful relations between states ; the connexion and reciprocal influences of scientific and literary workers belonging to various nationalities, cannot, it is evident, be included within and comprised by any definite expression that would give a measure of their growth from time to time. The case of commerce is in this respect INTRODUCTORY. 3 different. The elaborate and laboriously-worked-out statis- tics of official departments supply abundant data for a full and careful estimate not simply of the fact of extended trade, but also of its amount. To give a few illustrations which bear out this assertion, we may first take the case of England. A glance at the Board of Trade returns for 1897 shows that the sum in values of imports and exports (re-ex- ports included) for that year was a little under ;^7 5 0,000,000. These figures may at first surprise by their great amount, but they can be easily understood and compared with similar returns for previous years, and with the estimates of the amount of domestic trade, so as to give an approximately correct idea of the quantity and proportion of national wealth that is concerned and employed in this branch of trade. The foreign commerce of other countries is not on so extensive a scale. Owing partly to the natural advan- tages of situation, and to facilities for obtaining abundant supplies of raw materials, but also partly to the absence of legislative restrictions, the development of British commerce is by far the greatest that has yet been known. Still under far less favourable conditions, both. natural and artificial, France has had for the year 1897 special foreign commerce to the amount of almost ^^31 0,000, 000, while the American Union, whose policy is avowedly restrictive, and which possesses within its own territory most of the staple articles of industry, and is so far relieved from any pressing need for foreign commerce, shows for the year 1896-97, a sum of imports and exports of over ^360,000,000. The figures just stated are not less impressive and much more readily comprehended than the most complicated tables giving the quantities and values of each of the innumerable articles that enter into the course of foreign 4 COMMERCE OF NATIONS. trade and swell its total. They prove conclusively that this part of economic activity is one of the most potent of the factors which taken together make up the general industrial movement, and one moreover that cannot be put aside or neglected by any one who desires to form an intelligent idea of the world's advance. It would be no doubt an error, to follow the old mercantile belief, and regard the amount of foreign trade as the sole and sufficient measure of national progress. Even for England domestic trade is on the whole much more important ; it is far larger in extent, and it enters more closely into every part of national life — a state- ment that is still more unreservedly true of countries like the United States. The decline of foreign commerce may conceivably be accompanied by a more than counterbalancing expansion of internal trade; but this case so rarely occurs that it hardly requires notice as a practical limitation of the proposition that the enlargement of international exchanges is an indication, and in itself a part of economic improvement, and that in the long run there is a connexion between the smaller movement and the larger one of which it forms a part. To explain the working of this part of the economic system, and to form a judgment as to the policy applicable to it, is the object before us. For the end in view, it is necessary to consider the principles or rather conditions on which international in common with all commerce is based, and more particularly the modifications that its special characteristics make requisite in the use of the laws of exchange for the purpose of interpretation. By adopting this course, a great many of the erroneous conceptions that interfere with the acquisition of a proper knowledge of the matter will be indirectly removed, and the groundwork of many fallacious arguments will be destroyed without the need INTRODUCTORY. 5 of much formal refutation. The commercial policy actually pursued by nations will then claim attention, both in its historical development and its present position in the leading countries of the world. This review of former and existing state policy in respect to foreign trade will lead directly to a comparison of the methods pursued, and an estimate of their comparative efficacy in promoting national welfare ; and in this connexion the various erroneous or incomplete theories that have influenced state action will be examined and criticized. Before commencing the inquiry thus outlined, a prelimi- nary difficulty may be removed. Without attempting to enter on the subtleties of the subject, for which there is no place, it is desirable to state expressly what is meant by international commerce. Our answer to that question is as follows: — All commerce comes under the head of inter- national which is carried on between persons resident in different ppHtical entities or units, even though — as in the case of England and India — they may stand in the relation of ruler and subject. This use of the term is at once simple and convenient; it accords closely enough with popular phraseology as well as with the more technical application made by official statisticians, who always separate such trade from domestic transactions, for which reason its special investigation is peculiarly suitable. Another reason in its favour is found in the fact that it is to this division of commerce that state interference on economic grounds has been almost exclusively directed. It follows that for the practical object of considering the effects of different lines of policy, there is a great advantage in confining our attention to a well-recognized area within which the agencies under examination have been chiefly employed. 6 COMMERCE OF NATIONS. The commerce of nations when regarded in the way just suggested, is evidently liable to shrink or expand in proportion to the junction or division of political units. That is, in other words, its amount will in great measure depend on the number and distribution of the nations in the world. Thus, to give instances, the creation of Italian unity changed so much foreign into domestic trade ; and if the formation of the German Empire had not a like effect, it was due to the fact that commercial unity had there been attained at an earlier date through the Zollverein^ or Customs-union. The separation of Holland and Belgium is an opposite instance, since by it there was an increase of foreign at the expense of domestic commerce. These particular cases, however, have hardly any effect on the general movement. Whatever transfers may take place between the fields of home and foreign trade, the general facts and operating tendencies remain substantially unaltered; and for purposes of comparison a sufficiently correct allow- ance can be made with regard to the few changes that occur within the periods to be compared. CHAPTER IT. LEADING FEATURES OF INTERNATIONAL COMMERCE. At first sight it would appear that domestic or internal trade was by far the earliest, and that foreign commerce came in as a later addition, the result of more advanced economic development ; and if the statement is limited to commerce as it exists at present, and to the actual division of home and foreign trade, it is certainly correct. But in another and wider sense of the term it is possible to maintain the seeming paradox that the first exchanges were international (or rather intertribal). Recent investigations of the early history of law and institutions, such as those of Sir H. Maine and De Coulanges, tend to establish that the unit of primitive communities was the family, rather than the individual who occupies that position in modern times. The elaborate formalities of ancient law were suited to such a conception, and resemble the modes of commercial intercourse that are now retained only between states. The primitive kinds of contract are particularly interesting in this respect, since one of the most important of contracts — sale — is closely bound up with conveyance, the legal form of the fact of exchange whose economical bearings we have been considering. Without accepting all the details of any theory of the 8 COMMERCE OF NATIONS. ancient contract of sale or barter, it may be confidently held that it was hedged round with complex formalities, most of them indicating that the process was one that affected the community and required its sanction as a condition of vaHdity. This can only be explained by reference to the comparatively small number of exchanges, which were not necessary within any group, "as there property was held in common,'' and only took place between " house communities'' or "tribes." Thus, if the conception of international trade may be so widened as to include all dealings between groups or bodies, or between members of different groups, we may say with truth that it is the oldest and most primitive kind of trade. The interest of this result is not purely historical ; if it were so we might here safely neglect it. It has, however, a practical value, as it shows the long-continued working of conditions that are still potent in determining the course of foreign trade, and it to some extent throws light on the real source of much legislative regulation whose origin is now completely forgotten, but which has been produced by the old sentiment of tribal jealousy. The barter that takes place between savage groups has often been referred to a? giving a simple type of exchange; it may here be employed to illustrate the special features of international trade. When division of labour has been developed, and when trade and industry have been specialized in many forms, with numerous producers of each, competition tends to bring about some proportion between the reward of the workers in each department. The terms of exchange, or when money is introduced the prices of goods, are fixed by the sacrifices involved in their production ; or, to use the technical term familiar to economists, the value of such goods INTERNATIONAL COMMERCE. 9 depends, in the long run, on their " cost of production/' International trade, even in its highest existing forms, does not exhibit this feature. With respect to early societies or modern savages, the extreme difficulty, indeed impossibility, of transferring members of one group to another for the sake of any economic advantage is obvious ; what is not so clear is, that all through the growth of nations the same difficulty has presented itself, though not, perhaps, in so extreme a shape. Within a nation or group it is possible to move labour and capital from one employment to another, if not with the perfect ease and absence of friction that economists have too lightly assumed, yet with substantial effect on the relative rate of remuneration and the values of commodities. The passage of these industrial factors from country to country is not so readily accomplished. Great advances have indeed been made in recent years in this direction, and the international movement of capital has now attained vast proportions. Powerful obstacles however remain ; the hindrances of distance, difference of language, customs lines, and social and legal arrangements have by no means lost their effect. The movement of labour towards new countries, which is now so large, can hardly be distinguished from the natural increase of population. It probably in some degree checks the latter in countries of immigration, and certainly stimulates it in those of emigration. The similar movement of capital is chiefly in the form of loans, which give rise to a new kind of international relation, " viz. that of indebtedness. On the whole the oM general* ization still holds good, which declares that the trade of nations does not conform to the law of cost of production ; but, as we have seen is the case with regard to primitive exchange, depends on the comparative needs and supplies lo COMMERCE OF NATIONS. of the trading countries, or, to use another technical ex- pression, on "the conditions of comparative cost." This latter proposition must be fully understood in order to follow the working of commerce between nations. It is often imagined that if the industrial powers of one country are inferior to those of another in all respects, that the former will, so the phrase goes, be undersold by its rival in respect to everything that it produces, and have to abandon all industrial pursuits. Such is, however, not by any means the case. A reference to the analogy of exchange between tribal groups or individuals will indicate where the error lies. What is carried on between such bodies is exchange^ which involves the giving and receiving of com- modities on each side. The cause of exchange is found in the differences of the comparative estimates formed respecting the commodities that are the objects of trade. For a nation or country this comparative estimate depends on the difficulties of supply, /. e, speaking generally, on the cost of production ; though in special instances they may be ( the outcome of scarcity, and no further supply may be ' obtainable at any cost. In any case the rule of comparative cost includes and explains by far the largest part of foreign commerce, and so far from being a strained or unnatural application of theory, is in reality only the form that the general condition of exchange between separate persons or distinct groups assumes when applied to countries whose system of internal exchanges is regulated by cost of production. The use of the doctrine of comparative cost in throwing light on the course and extent of international commerce is I great. For it is on the existence of differences between icosts when compared in the trading countries that the INTERNATIONAL COMMERCE. ii possibility of any trade taking place depends. Where the I proportional costs are the same, there is no motive fori exchange, and it is by the amount of their difference that the I benefit, and therefore to a great degree the volume, of the transactions will be settled. To get a clearer perception of the real bearings of this essential condition for foreign trade let us take an actual case. What is the cause of the commerce carried on between England and the American Union, and why do certain articles form part of that commerce while others do not? Why, e.g..) should not England send the wheat of its southern counties to America in exchange for the iron of Pennsylvania and the cotton goods of Massachusetts? The only explanation open is the action of the principle of comparative cost. The cost of American wheat as compared with iron in that! country is lower than the cost of British wheat compared \ with the cost of British iron. Over the whole field of trade similar conditions operate, and it is thus that the actual ingredients of the reciprocal trade of two countries are arranged. 4 The action of comparative cost, using that expression with the liberal interpretation that we have put on it, as including cases of absolute limitation, is however hindered in its work- ing. It is not, as has sometimes been said, the " sufficient condition '' of foreign trade. Comparative costs of certain commodities may differ, and even differ greatly, in two countries, and yet those commodities may not be exchanged. The impelling force of all exchange is the economic motive of self-interest, and it may well happen that though the differences between the costs and therefore the values of the commodities under consideration would leave a surplus of advantage, yet the difficulties to be overcome in effecting 12 COMMERCE OF NATIONS. the transfers would impose a still greater cost, and more than neutralize the gain. This kind of hindrance is present in the earliest exchanges. If tribes are divided from each other by long distances, by rivers or mountain ranges, the chances of trade are diminished, and each group is more closely confined to its own resources. What is true of primitive trade is equally applicable to the widely-developed commerce of the present age. The obstacles to transport of commodities, whether natural or artificial, are even now a considerable check to international dealings in some classes of goods. In former days they practically confined foreign trade to dealings in luxuries, since none but very rare and valuable articles could bear the heavy cost of transport and the high profit which was needed as an insurance against risk. By degrees, as we saw, the expense and danger of trade have been reduced, with the result of ever increasing the list of goods that are exchanged between nations, and therefore, in Cobden's happy phrase, " widening the circle of exchanges." Recent developments in the commerce of nations supply many illustrations ; it is as much to cheaper carriage as to cheaper silver that we owe the Indian wheat trade. The American and AustraHan exports of meat are also in point, as is too the English export of coal that has now reached such large proportions. The German iron export may be added to the above cases; but even the smaller industries give abundant examples — e.g., the recent increase of English fruit imports. The general principle is moreover too plain to require any lengthy elucidation or support by evidence. ' That the reduction of impediments will increase foreign trade is as true as that the lowering of the tolls for crossing a bridge will generally add to the traffic that passes over it* INTERNATIONAL COMMERCE. 13 Another agency also tends to prevent the exchange of . goods between countries even where their comparative costs are not the same. Thoretical writers on political economy have often shown an unfortunate disposition to regard foreign trade as if it were in each case confined to two countries, though they would of course reject such a belief if explicitly stated. The oversight is not, however, confined to them. In popular discussion, from which all pretence of theorizing is supposed to be excluded, the same fault frequently appears. \ Any measure affecting trade with par- ticular countries is estimated as if its effects were confined to such trade, and no allowance is made for the reactions that will be produced on other branches of foreign commerce.Y Neither in theory nor in practical questions is such an omission justifiable. Modern commerce is not confined to exchanges between any two countries, no matter how powerful or wealthy ; it is rather a system of connected markets, each of which is the seat of a smaller system. To return once more to the often-used analogy of primitive tribes or scattered settlers, we see that as the separate groups, tribes, or families become connected in the larger system of internal trade ; as the settlers on a western border state come after a time to deal in the town which furnishes the traders' centre or market of their district, so do the various indepen- dent countries of the world form by degrees what we may call a world-market, though it has no single locality that can be looked on as its centre. The growth of foreign com- merce has made this so plain that it can hardly escape any observer's notice ; but a less evident fact is that it has been gradually forming during the course of European history, and has not yet reached its limit. During the later middle ages the Italian cities ; in the seven teeth century the Dutch ; at 14 COMMERCE OF NATIONS. present England 5 at a future time the United States, or perhaps Australasia, may claim to be the nearest approach to the central point or localization of this world-market. But however this may be, the most important result for the present is, that Jas in the national or district market there is competition between the producers and the consumers of the various wares, so is there a like competition between the several producing and between the several consuming countries in the market of the world.- The former kind of competition tends to lower the value of articles, the latter to raise it. Thus, to show the working of this state of things in fact, the competition of India, Russia, the United States, and Australia tends to lower the world value of wheat ; that of India and China has a like influence on tea ; while the com- petition of England, France, and Germany (though very feeble as regards the two latter) has an opposite effect on wheat; and England, Russia, the United States, and Australia, by their competition for the supply of the tea-producing countries, raise its value. Without adding any further in- stances, it is apparent that the mere fact of difference in the comparative cost of wheat and iron in England and the United States will not suffice to establish an exchange of those com- modities, for India may offer wheat to England on still more favourable terms, and Germany may prove a cheaper source for the iron needed by the Union. But there can be no question that the existence of each source of supply will affect the other, and that, impediments apart, there will be a movement towards a common world value for both wheat and iron. This competition of different countries, which is such a rapidly-growing factor in the commerce of nations, has a profound effect on its character and conditions. It has, as we shall see, important practical bearings on questions of INTERNATIONAL COMMERCE. 15 commercial policy, but for the moment it is chiefly interest- ing as marking the final step in the process of evolution by which the single and rare exchanges of savage tribes or families, which we found to be the rudimentary form of foreign trade, have passed into a world-wide system of commerce. That this development is parallel to the course of internal trade is evident, and it adds one more to the many analogies between the growth of national life and that of the body which international law describes as the family of nations. It was possible for a far-sighted person to argue from this analogy to the ultimate formation of modern international trade, and in fact the essential truth on the subject has never been better expressed than in the remark- able dictum of Dudley North, published more than two hundred years ago, which declares, " That the whole world as to trade is but as one nation or people, and therein nations are as persons.'' The analogy of individual exchanges at once points out the benefits that may be expected to result from those that take place between nations. As in the former class each party concerned gives what he wants less than what he receives in return, so in the course of international commerce more valuable products are obtained in exchange for less valuable ones. Looking generally at the facts, it cannot be disputed that such is the case. The corn, cotton, tea, and wine that Great Britain imports have a higher value in use to its inhabitants than the coal, iron, and manufactured goods that are exported in payment. We need only imagine the effects of a total cessation of foreign trade for six months to see the enormous advantage that is obtained through that agency, and though for other countries its absolute gain is not so great, yet in all cases there is a substantial balance of i6 COMMERCE OF NATIONS. advantage. A mere general assertion of the benefits reaped through commerce is not sufficient, since in fact it is composed of distinct elements that need to be carefully indicated. The first of these particular or special gains is the supply of previously unattainable goods. The earliest commerce was direct5ed to this object. The trader brought oriental products into countries entirely destitute of them, and manufactures to uncivilized tribes, taking back the peculiar products of each country. Modern commerce also deals largely in such objects. A cursory examination of the articles that enter into the world's trade will establish the fact. The modern breakfast-table would be otherwise impossible, and what is true of the most civilized nations is equally true of the rudest ones. But a second result of international trade is perhaps even more advantageous. As domestic exchange enables division of employments to be carried out with an accompanying increase of production and immense gain to the community, so does the system of trade between countries allow each to develop its special aptitudes, and thereby to add in a greater degree to the wealth of the world. The territorial division of industry under which goods are pro- duced, not only by the fittest men but in the fittest places, i is an outcome of international trade, and one greatly for the I -material advantage of all countries. International division ij of labour confers a further benefit. At first it is probable that ' the division between individual producers was due to special qualities on the part of the workers who, so to speak, differ- entiated themselves from their fellows ; afterwards it is found that even were all men alike, there is a profit in assigning a special vocation to each, owing to the increased skill that practice gives. In a less degree the phenomenon repeats it- self in the case of nations. The concentration of labour and INTERNATIONAL COMMERCE. 17 capital, the superior organization of industry that is the result of directing a large part of the national production to a single object, yields a much greater return, and thereby gives a larger contribution to the total wealth of nations. It is the territorial division of labour that has placed the English cotton industry in its present position, or at least it was one of the conditions essential to its attaining that ^ Mint. ^ 4 For a thorough understanding of the general influence and effects that the commerce of nations is likely to produce, it is indispensable to realize clearly its connexion with the fundamental condition of division of labour and consequent specialization of employments. Unless we bring ourselves to perceive that the movement towards an increase of trade relations between nations is parallel to, and accounted for in the same way as, the growth of domestic trade, and on the whole confers the same benefits, we are likely to be mistaken both in our interpretation of the facts of foreign commerce and in our judgments on matters of commercial policy. Instances of errors produced in this way will often be met when examining legislation on the subject. As yet but one side of the picture has been presented ; the advantages that fresh exchanges and increased division of labour bestow on society have been a favourite theme of economists, who in many cases have dwelt with peculiar satisfaction on the working of private interest for the general good. There is much justification for the course. The play of the economic organization steadily becoming ever more and more intricate attracted the admirer of scientific law in social matters. The immense gains to all concerned seemed the more valuable as they were obtained without any ill- judged interference on the part of the state, furnishing at c i8 COMMERCE OF NATIONS. once an illustration and a vindication of the working of laissez /aire. This mode of treatment, though tempting, had nevertheless its dangers ; if one school persistently devoted its efforts to a glorification of the results of increased ex- change either internal or foreign, it was but a question of time for an opposing one to come forward which would seek to depreciate those gains and magnify any observable faults, ^he task of contradiction was taken up in regard to internal trade by the socialists, while the protectionists discharged a like function for foreign trade. ) One of the main links be- tween these seemingly different sections is their position on the point before us. Without at present entering into the details of a controversy that will be better discussed later on, it is in place to note the portion of truth contained in the criticism of international division of labour. There can be little doubt that the more elaborate the machinery of trade the easier it is to put it out of gear. In the simple cases in which we found the origin of foreign trade a temporary disturbance did not so much matter. Each small society was in essentials self-sufficing. The intermediate stages of growth show, if not the same independence, at least consider- able capacity for meeting all wants, if it should be necessary, from the national resources. The modern state is quite dififerently situated. It requires a violent effort of imagina- tion to conceive the condition of a modern European country completely isolated from all other countries. Revolutionary France never reached this condition ; but its position and its losses, taken together with the fact that foreign commerce has vastly expanded during the present century, will give a slight measure of the evils that complete interruption to trade would cause. It would therefore seem that the out- break of war might seriously affect a community that had INTERNATIONAL COMMERCE. 19 formed the habit of drawing its supplies from other countries. There is a further and perhaps on the whole a greater difficulty. The adjustment of supply and demand is always a problem that tries the skill of producers and dealers, but in regard to international commerce the task is peculiarly arduous. The regulation of supply for distant markets, the / attempt to estimate what may be expected from other countries, the effect of the cross relations of the many trading nations, are all questions that, if they had to be determined by calculation, might at once be surrendered as hopeless. In spite of the wonderful acuteness which has been developed in traders through experience, mistakes often occur, and the consequence is sometimes the disastrous event known as a commercial crisis. Now if the growth of international trade has established these relations, it is evi- dent that any loss so produced must be placed to its account. Another drawback to division of labour has been fre- quently urged against the form of it in which we are specially interested. The individual workman, by being limited to a single employment, is weakened in his general powers. Some simple manual operation repeated incessantly for several hours of the working day does not afford sufficient scope for the exercise of the faculties required from the citizen of a free community. There is an admitted necessity for remedying this evil by the aid of education and political training. Precisely the same evil results, it is urged, follow from unrestricted foreign trade. The nation given up to a single industry, or set of industries, may indeed, economically speaking, gain, but only at the expense of the qualities that contribute most efficiently to a vigorous national life. The best mode of dealing with such difficulties is not to ignore them or treat them with contempt ; it is 20 COMMERCE OF NATIONS. rather to assign them their proper place in relation to the theory and policy of commerce. International, like all division of employments, has certain drawbacks which in striking a balance of the sum of gain should be carefully estimated. On the whole it appears that the benefits exceed by far the losses in either case. Just as no one seriously proposes to go back to the ruder systems of industrial or- ganization because labourers are often out of employment, or some men suffer from the undue monotony of their work, so there is no valid ground for opposing the development of international commerce on account of possible wars, occasional commercial crises, or such an unhappy and one-sided form of industry as formerly prevailed in the southern states of the American Union. All these cases suggest not limitation, but further expansion and better organization of the system of exchanges, by which their evil effects will be diminished, and it may be hoped finally disappear. In addition to the difficulties just examined, which are common to all exchange, foreign commerce has one that is peculiar to itself. When in the course of domestic trade two persons exchange goods, we may fairly assume that each is benefited, as otherwise he would not be a consenting party to the transaction. On passing to foreign trade a new complication comes in ; as before, the parties directly concerned are individuals, and we can continue to believe that they are gainers, but does it follow that the nations to which they belong also gain ? Is there not a tacit assump- tion that individual and national gain are identical, or in other words that there is a harmony of interests, without adequate proof of the fact ? There can be no doubt that in such cases a divergence of interests is possible — and it may INTERNATIONAL COMMERCE. 21 be remarked that some domestic exchanges may conceivably • injure the national interest; but at the same time the gain of the individual exchanger is so far a national gain, and the increase of utility through each separate transaction of foreign trade when summed up gives the result of the whole, subject to any special losses to other members of the nations. The latter have moreover to be proved, not by vague general assertion, but by precise evidence, and it must be shown that they exceed the direct gain of exchange. Some of the riiost unfortunate legislative measures, e,g, the prohibition of the export of English wool in the last century, have been based on the supposed opposition between personal and national advantage, and it may safely be said that no claim should be more jealously scrutinized on its merits. To sum up the results that we have attained — It appears that international trade in its most general form of deahngs between distinct groups is of great antiquity ; that it is not even at present to be treated conveniently in the same way as domestic trade, since values are not fixed by the same conditions i that international trade is the result of differences in comparative cost of producing the articles traded in, though the action of this law is limited by hin? drances to trade and the competition of different countries \ that a country derives great advantages from its foreign trade, which is from one point of view a development of the division of employments, that is at once a cause and an index of civilization ; and finally that these gains may possibly be accompanied by certain losses, as is the case in all such division, but that these instances are merely possibilities, and not likely to be serious in practice. CHAPTER III. MONEY AND INDEBTEDNESS IN FOREIGN COMMERCE. The leading features of international commerce and the conditions that govern it have now been sketched. Without entering into details that are only fitted for an economic text-book it is difficult to obviate all objections, but the central position that all exchange, foreign or domestic, is usually beneficial to the persons trading, requires rather clear exposition than elaborate proof, and will receive additional support from the evidence that the actual opera- tion of a liberal policy affords. There are, however, some questions connected with the general character of foreign trade that must be briefly examined before passing to the more practical part of our subject. First amongst such points is the relative amount of benefit gained by trading countries. In the older theories this was a vital matter ; with some countries trade was, it was thought, always gainful, with others it was always injurious, while with a third it was good or bad according to circumstances, the one criterion of merit being the tendency to cause an influx of the precious metals. It is only necessary to glance over the titles of the chapters of Sir J. Steuart's Principles of Political Eco7iomy (1766) to see how completely an acute INDEBTEDNESS IN FOREIGN COMMERCE. 23 and in many respects original thinker could be led astray by the prevailing belief. The regulations of commerce, of which the eighteenth century was so full, all depended on this belief, and were directed to secure a favourable result from trade with other countries. The modern view, which regards trade as being always advantageous and bene- fiting both sides, and which is in general so undeniably true, places the subject in quite another light. Instead of guard- ing ourselves against loss, we have only to consider what is our proportion of gain, which is after all more a question of scientific curiosity than of practical importance. If it were possible by legislation to obtain a larger share of the total advantage there would be more reason for the inquiry, but, as will appear in examining the protectionist policy, any effort of the kind is not likely to succeed. As regards the theoretical solution of the question, which forms a long and very difficult chapter in works deyoted to the subject, we need only notice the chief results. 'In order that trade shall be steadily carried on between two countries, /v, the value of imports must (other relations being for the ^ moment excluded) equal the exports, since the latter are the payment for the former. This proposition is simply the extension to the sum of foreign trade of what is plainly true with regard to any particular case of barter, and cannot be denied by any one who comprehends the real nature of trade. The estabhshment of this equality of value between imports and exports is brought about through the arrangement of the terms of exchange for goods, and those terms are influ- enced by the desires of consumers in the trading countries. ' Thus the more eager the demand of a country for foreign j goods, the greater will be the amount of home products to 1 be given in exchange ; and the more other countries require 24 COMMERCE OF NATIONS. the products of a particular nation the better will be the ^erms that it can make with them This general statement is, however, too vague to be of much practical use, and is ifurther complicated by the existence of numerous countries which supply and demand the several products. Fortu- nately for the more pressing questions of policy no precise and definite solution is required, and further discussion of the matter may without loss be left to theoretical students. A point of much greater importance, and one which has given rise to serious misconceptions of the real nature of " international commerce, is that of the action of money. All modern trade is carried on by the use of a circulating medium, transactions being invariably expressed in terms of it. The exporter does not expect goods in exchange for what he sends out; it is their /w^ that he requires. The result is ■""'that all foreign trade is in appearance dependent on the conditions of price, or in other words the value of money, and it seems as if the most essential part of trade was that directly relative to this universally-needed object. Here too a reference to the case of domestic trade helps to explain the true position. Money is an invaluable instru- ment for facilitating internal trade, but it is evidently not the motive power which causes exchange. Relative prices of goods are adjusted to their relative values, which gener- ally depend on the cost involved in producing them. Foreign trade is not in this respect different ; in fact where two trading countries possess different currencies (as where one has a gold standard, the other using inconvertible paper money), there is little difficulty in seeing that the trade between them is barter. The development of commerce has also helped to make the truth plainer. In the earliest stages before money had come into existence, no one could think that INDEBTEDNESS IN FOREIGN COMMERCE. 25 trade was other than it appeared to be, viz. an interchange of goods. The introduction of money with its great advan- tages, and backed up by the power of the state, led to an almost superstitious veneration for it as the " oil,'' the " life blood," or the " sinews " of trade, according to the particular line of metaphor adopted. By the growth of the credit system, on which both domestic and foreign trade are now based, the fact that goods are ultimately exchanged for goods is brought home to all concerned. Credit documents, either cheques or bills of exchange, bear on their face their true character and function as a part of the mechanism of exchange, as does also the latest development in this direc- tion — the telegraphic transfer. The immense extent of foreign commerce, too, goes far to disprove the notion that the small store of money applied by nations to facilitating payments of balances in this department of trade could be ri primary force in operation. The principal difficulty of this part of the subject is not;| yet disposed of. ** That in the long run goods are exchanged j for goods " ; " that the commerce of nations is in reality a system of barter on a magnificent scale " ; and " that money is simply an instrument to aid that barter," are pro- positions of unquestionable truth ; but it is possible to admit their correctness and yet to feel puzzled as to the operation of money on trade. "If," it may be asked, **money is nothing but a particular kind of machinery which produces no original effect, how do you explain the importance ascribed to it in the commercial world ? " " Can any one doubt that the quantity of money in a country affects its foreign trade ? " Such questions touch the point that misleads many persons interested in the subject, and properly answered they help to dissipate mistaken views. The true solution is found in 26 COMMERCE OF NATIONS. the statement that the distribution of money among the countries of the world is the result of foreign trade ; and that therefore the quantity of money in a country, which certainly influences prices, is dependent on the trade relations of the particular country with other nations. To establish .this proposition there is no need to appeal to abstract argu- ments ; the concrete facts of commerce are quite sufficient. ■ We know that bullion in small quantities is constantly pass- ing from country to country as the rate of exchange, which is affected by changes in trade, varies, and it is equally obvious that the countries which produce the materials of money will export it in the ordinary course of business; there is, therefore, no difficulty in understanding the importance attached by traders to the stock of money and its probable movements. The latter are in reality indices of the position of trade, and mark its tendencies. Besides, the quality of legal tender which money alone possesses, makes it very much desired at times of pressure, and thus the influx or efflux of the precious metals may allay or intensify commercial distress in any given country ; but this in no way aflects the general and permanent fact that the partition of the world's store of money and the resulting scales of prices are determined by the conditions of foreign commerce. The strongest evidence in support of this view is obtained from those cases that at first sight seem to be altogether outside it. Every one is aware that the money standards of all countries are not the same ; some use gold, others silver, and a third class put up with inconvertible paper for their circulating medium. Now with different materials for money there can be no eflective redistribution of the supply. Indian silver is not available as money in England, nor English gold in India, nor would the paper of the Argentine INDEBTEDNESS IN FOREIGN COMMERCE. 27 Confederation be accepted in either. Another way of reaching the same final result is adopted. Instead of sending money from India to England, or vice versd^ the gold price of silver is altered, and has just the same effect. For the English importer takes the gold price of the silver that he receives for his goods in India into account in his calculations, as the Indian exporter takes the silver price of gold. The value of the Argentine paper money is a factor in the trade of Buenos Ayres, and it moves with the fluctuations of commerce. What is so puzzling and obscure when stated in abstract form is clearly established by reference to the ordinary and familiar facts of international commerce. The full understanding of the proposition that all com- merce is in essence the interchange of commodities, and its application to the interpretation of the movements of trade, goes a long way towards removing the difficulties that would otherwise present themselves, but it does not account for all the forms of international commercial relations. . If foreign trade were merely a highly-developed system of barter it would necessarily follow that the values exchanged on each side should be equal. What a country like England sends out should exactly balance what she gets in ; that is to say, imports should be equal in value to exports. This, J ever, is manifestly not the case either as respects English e .with any particular country, say France, or with the id at large. /On the contrary, the permanent excess of orts over d^orts is a perpetual sorrow to the upholders ; of " fair-trade^/ doctrines, who point to it as a sufficient proof of the error of our present policy. -^— The difficulty finds its solution in a fuller analysis of the economic relations of nations, which are not limited to a short interval of time, and include more than the actual 28 COMMERCE OF NATIONS. interchange of goods. First as regards trade with any par- ticular country, it is evident that with the close connexion of nations that now exists, there are abundant facilities for set- ting off an excess of imports from one country against an ex- cess of exports to another. England may import from America more than she exports to it, but if her exports to a third country, say India, exceed her imports thence by an equal amount, while American imports from India are'greater than the exports to that country to a like amount, then by a simple balancing of accounts all liabilities can be cleared off. The realities of commerce are not so simple as the supposed case, but however many be the countries engaged, so far as the system of set-off can be used, we may be sure that it will be. Just as the clearing-house cancels an enormous number of domestic trade transactions, so does the international organization of the foreign exchanges wipe off the balances of trade between countries to the utmost extent possible. A country whose total imports and exports balance, can close its accounts without difficulty. Where however there is an excess of imports or of exports on the whole result of foreign commerce, this explanation does not avail. It will not account for the fact that for the last thirty-five years the imports of the United Kingdom have in every year been more than its exports. Through all the fluctuations of industry and trade, alike in times of prosperity as of adversity, this constant relation has shown itself. The difference is not indeed the same, nor even in proportion to the mass of trade ; it has varied from (in round figures) ;^24,ooo,ooo in 1859 to ;^i42, 000,000 in 1877, and out of a total trade of almost ;£'7oo,ooo,ooo in 1872 it was only ;^4o,ooo,ooo, or about 6%, while the above-mentioned difference of ;^i 42, 000,000 in 1877 was INDEBTEDNESS IN FOREIGN COMMERCE. 29 on a total trade of ;^646,ooo,ooo, giving 22" j^. The long continuance and the vast amount of the balances, which for the forty years (1856 — 1895) are over ;^3, 300,000,000, at once suggest that they are the outcome of the per- ^ manent conditions of British commerce. No explanation ^ that refers to temporary causes or the fluctuations of trade 1 is sufficient. Nor can the existence of the relation affect V industrial welfare. No connexion between specially largdij \ t" excesses of imports and industrial depression can be shown. II When once we see that the phenomenon is a long-con- tinuing one, it is not difficult to obtain a satisfactory explanation of it. Besides the usual commercial inter- change between countries, there are many forms of economic relations, and it is to these additional influences that the peculiarity of English trade returns is due. Exports obviously pay for imports so far as they go, but\ for the amount that remains other modes of discharging indebtedness must be established. Such are, first, the a credit relations of the countries. Nations, or rather the. individual members of nations, lend large sums to foreign governments, companies, and individuals, and these loans affect the relations of imports and exports, but in a somewhat complicated way, for the contracting of a loan increases the export from the lending country ; we may almost say the increased export is the loan. When an Australian colony borrows in England for railway construction, and imports steel rails, railway-engines, waggons, and labourers* clothes from the same source, these forms of capital are really the shape in which the loan passes. It may be that instead of importing manufactures the colony retains so much of its products for home use; in either case the result is the same. The relation of the two countries is affected" i 30 COMMERCE OF NATIONS. by the contracting of the debt just as it would be if the borrowing colony had exported commodities to the same amount. The loan is practically an immaterial export. This however is but the initial effect. Borrowing under modern conditions implies the payment of interest, and consequently in succeeding years the colony of our supposition will have to meet this new liability by sending out additional exports sufficient to provide for the interest falling due ; and finally when, if ever, the principal is being refunded, it must be in the same way; as borrowing means pro tanto increased imports, so does repayment mean increased exports. The excess of English imports is largely due to the action of these agencies. ^The accumulated wealth of the United Kingdom has for many years flowed over into foreign investments, and for the time increased its exports; by degrees the interest on the capital thus applied has grown to an even larger amount than the fresh annual supplies, with the necessary result that imports have been increased, and any check to the course of new foreign investments has at once made their excess much larger. The increase in the balance between 1872 and 1880 was for the most part due to the indisposition of English capitalists to invest in foreign securities with the freedom that they had previously done. The difference which in 1872 had been ;^4o, 000,000, rose to ;^T 25,000,000 in 1880, giving evidence of the vast extent of the international movement of capital. The effects of borrowing, both immediate and ultimate, though very important, are not the only influences that affect foreign commerce. The actual transfer of commodities from country to country is itself a considerable industry, employing much capital and labour, and requiring for its permanent existence a reward given by the profits and wages earned. o l( INDEBTEDNESS IN FOREIGN COMMERCE. 31 This gain evidently accrues to the countries whose citizens own and work the shipping engaged in the trade, and who furnish a kind of export in the form of services rendered. (A nation that possesses a share of the carrying trade of the world will so far have an excess of imports, which are the payment for work done in this direction. The supremacy of England in shipping is therefore a' second reason for her apparently excessive imports.^ Estimates will naturally differ as to the proper sum to assign to this cause, but the most careful observers have given ;^6o,ooo,ooo annually as a probable figure. y Besides these two specially powerful influences, there are"^ several 9ther circumstances that affect the course of foreign commerce, and help to form the total of what may be described as international indebtedness. Amongst them are -> , — Remittances to absentees ; Government payments abroad ; -. earnings of foreigners who remit them home. Each of these has its opposite aspects according as we consider the pay- ing or the receiving country, but all, so far as they are opera- tive, must be taken into account. As examples we may give the outlay of Americans in Europe, the so-called home pay- , ments of the Indian Government, and the gains of English i traders and professional men resident in other countries. > It ought now to be evident that the mere imports and \v exports of a country are not by any means the only conditions that determine its position and economic relations with regard to other countries. They are but one element in the larger account made up by the various causes of indebtedness, and which must all be noticed in order to interpret completely the course of foreign trade. This has been already shown in respect to England, and similar consider- ations are applicable to other countries. It is only by 32 COMMERCE OF NATIONS. taking this wider view that the large excess of Indian exports can be understood ; when so regarded it becomes quite intelligible. . The recognition of the several forms of international obligation also allows of a better statement of the stable condition of trade. So long as actual exchanges only are taken into account the outgoings must, it would appear, equal the incomings in value. The true criterion of stable trade is, we now see, the equalization not of exchanges, but of all claims on each side. The debts of a nation to other nations must be balanced by the debts of other nations to it, and this point is in fact attained ; any temporary deviation during a given period being easily corrected by the passage of bullion or increased exports from the country in debt, or by formation of an additional claim on the part of the creditor country. iThe actual processes of international commerce and the refined mechanism by which accounts are adjusted, and the transfer of the precious metals as far as possible avoided, are a special part of the subject, and they illustrate the work- ing of the general principles ; j but there is no necessity for entering more fully on the details of such operations, which more fitly belong to technical treatises. A cleaf.perception of the broad features of commerce between nations and its effects on national advantage is an absolutely 4"equisite preliminary to any attempt to judge the merits ofrdifferent hues of policy. Until we know what commgj^does, and its bearing on national welfare, we cannot g(||||Phether it is wise or the reverse to prohibit it altogether, or to load it with restraints, but discussions of the technicalities of the subject may be dispensed with. CHAPTER IV. THE MERCANTILE SYSTEM. The real meaning and bearing of the policy known under the name of the mercantile system has been so often misunderstood, and the tendencies which produced it are so various and in appearance divergent, that some attention is needed in order to get a precise conception of its nature and working. Historians of commerce and political economy have too often looked on all systems of regulation as identical, and have therefore failed to appreciate the shades of differ- ence in the methods employed. /The mercantile system was a natural product of the time in which it originated, and is best understood by reference to the circumstances then existing. The nations of Europe had acquired their separate national characters, and in the case of some of the most important, their distinct govern- ments. The New World had supplied a very large addition to the stock of the precious metals, and had thus aided in breaking up the older economic system j money was more used in ordinary transactions, and was more eagerly desired by statesmen. The extensive "fields of colonization offered to the maritime nations of Europe became the object of competition, partly as a means of gaining the gold and 'J 34 COMMERCE OF NATIONS. silver deemed essential for national prosperity, but partly also as furnishing at once a supply of raw materials and a market for manufactures. The promotion of foreign commerce was seen to be powerfully assisted by the possession of a national marine that carried forth the products of the country and earned a profit for its owners. These circumstances would not of themselves fully account for the mercantile system. We must further take into account the hostilities in which the states of Europe had been engaged, which made it almost inevitable to extend the sentiments of rivalry generated by war to commercial relations. The- objoct o £. t he statesman was to protect the home-market against the inroads of alien goods, and at the same time to develop foreign markets for home productions. In this way the store of money would be increased, and the prosperity of the nation augmented. For, even in its highest form, the mercantile school carried on that exaggerated belief in the benefits of money that has been already noticed as existing in earlier times. It did not indeed hold that money alone was wealth, but it re- 1 garded the precious metals as being a peculiarly durable and permanent form of wealth ; and besides, it accepted the view, often maintained at present, that increased supplies of money acted as a stimulus to trade. The chief advance in the* later mercantile system was in respect to the methods adopted for securing the influx of this precious agent In- stead of the old regulations forbidding the export of the precious metals and providing for supervision of foreigners who might remove the national currency, it directed attention to the relation of imports and exports. ' When a country ex- ! ported more than it imported there must be, it was argued, a debt due to .it for the balance, and a debt that could be discharged only by the payment of money ; if imports were THE MERCANTILE SYSTEM. 35 unfortunately greater than exports, the case was reversed, and the country would have to send its money abroad. To preserve the nation from loss the best way was, apparently, to take care that there should be a permanent excess of exports over imports. / This object was the real point towards which all the mercantilist regulations were directed, and they can be fully understood only by reference to it. A theory of commerce was built up--from a particular and inaccurate interpretation of facts, and derived its force and influence from the surrounding historical conditions and modes of thought. The true meaning of the system comes out with greater plainness from a brief consideration of its particular methods. A whole book of the celebrated work that overthrew the systenTIs a theoretical explanation of trade is devoted to an estimate of the actual effects of these regulations, which . appear in a very different light from that in which they kl * were viewed by their advocates. Foremost among the ^ measures whose wisdom seemed almost self-evident to the statesmen of the seventeenth century, was the discourage- ment of the import of any goods that could be produced at home. It is not difificult to trace the process of reasoning by which the conclusion was reached. Every import implies a corresponding debt in money; now, if the need of importing can be obviated, the liability will cease, but the fact that commodities can be produced in the country shows that their importation is not necessary, and therefore to hinder this needless process will so far reduce the moneyg other countries and increase the national wealth* commercial legislation of the period supplies innum? illustrations of the use of such restrictions. Thus the French minister Colbert, who may be regarded as the u iiiuuer ^^|e to hK|e 36 COMMERCE OF NATIONS. greatest practical exponent of mercantilism, sought most strenuously to encourage French manufactures by duties imposed on foreign goods. The edict of 1664, and still more that of 1667, tended strongly in this direction, and they were maintained and even increased in stringency by later f enactments. So in England all competition with the native ' woollen manufacture was impeded as much as possible. The silk and iron industries received the same aid and by degrees most of the smaller manufactures obtained some measure in their favour. In fact, this most important of the mercantile expedients has passed on to modern protec- tionism, where we shall again meet it. / Another part of the system has not had equal vitality, ^* /viz., that which aimed at prohibiting trade of any description / whatsoever with certain countries. The great object of trade "^1 being the obtaining of the precious metals, through the '/ maintenance of a " favourable " balance — /. and the mercantile system pre- scribed the encouragement of this branch of native industry. Whichever of two countries possessed the carrying trade between those countries would gain on the balance of trade, since, in addition to her ordinary exports, she would have to be paid for freights earned by her ships. Hence the '* Navigation Acts " employed both by England and France as a means of transferring the Dutch shipping business to themselves. * Such were the main features of the mercantile policy as it appeared in its full development. It is impossible to dwell at any length on each of the parts of the system, which naturally varied in different countries, but this makes it all the more necessary to remark that any attempt to give very briefly its broad aspects prevents our noticing the limitations and modifications that existed both in theory and practice. Writers who are classed as mercantilists form very divergent estimates of the value of the precious metals ; of the importance of national industry ; and of shipping or the colonial trade. So, too, the differences in practical legislation were by no means insignificant. Colbert is usually taken as a type of mercantile statesmanship, but his earlier measures show great moderation in the imposition of duties, while his testimony as to the temporary nature of the ^ policy is on record. In truth, the mercantile is like the feudal system, rather a phase in the historical evolution of Europe than a symmetrical body of doctrine applied every- where with equal rigour. There is, nevertheless, the utmost necessity for understanding its position and methods, j Without exaggeration we may say that most of modern | protectionism is simply a re-presentation of the policy of' 40 COMMERCE OF NATIONS. the mercantile school, with some of the leading conceptions modified and adjusted to meet the altered circumstances of the present Restraint of importation is an aim common '' to both, and even the reasons assigned do not differ much ; the method of bounties is in operation in some noticeable y cases, and fragments of the colonial policy survive in the ^ French colonies. The traditions of the system have further helped to create one very important part of protectionism, ' but as it were by repulsion American followers of Carey accept their master's view that " the American system," as they style protection, is necessary to counteract the baneful action of the English colonial policy of the eighteenth cen- tury. In these various ways mercantilism has so affected the course of economic history and policy as to need notice in considering the problems of to-day. An estimate of the economic and social effects of the mer- cantile system is not quite so easy to form, and the vacilla- tions of opinion in this respect have been remarkable. . At first it was regarded as a masterpiece of wisdom and state- craft. Then, under the influence of the liberalizing move- . ment of the eighteenth century, it was condemned as a /aJ y gigantic imposture. Ouesnay, the founder of the French (j^^ school of Economistes, has pronounced a memorable condem- nation of the system of Colbert, who, *' intoxicated by the trade of Holland and the tclat of manufactures of luxuries, threw his country into such madness that people no longer speak of anything except trade and money, without con- sidering the proper use of money or the real trade of a country." Adam Smith's abhorrence of the "mean and malignant" expedients of the mercantile system is shown all through the Wealth of Nations^ and theYoUowers of these distinguished economists have adopted their judgment. THE MERCANTILE SYSTEM. 41 Fuller historical inquiry, and the general change in the attitude of economists, have led to a more sympathetic treat- ment of the older policy. .Many modern students think with Roscher that a system which has lasted for centuries cannot be wholly erroneous, and they notice that the direction in which the mercantile policy tended to guide society was the true line of progress. The development of manufactures and the organization of national economies^^ with varieties of industrial pursuit were essential for the growth of the European state system. They thus reach the conclusion that mercantihsm was a necessary and beneficial stage of social development, not to be contemptuously set aside as the product of error and selfishness. There is much in this view that is in harmony with modern thought, but it needs certain corrections before being accepted. The conditions that produced the mercantile policy have been already set forth, and it is plain that they naturally led to its adoption. Its beneficial action is not so clearly made out. The time had not come for widely-extended trade ; inter- national relations were in too rudimentary a condition to allow of active commerce, but the hindrances on such ^ commercial intercourse as actually existed were, we believe, extremely detrimental to progress. It was perhaps as impossible for the men of that time to understand this fact as to disbelieve in witchcraft. We cannot, however, doubt that a wider insight would have been for the advantage of national life. CHAPTER V, THE OVERTHROW OF THE MERCANTILE SYSTEM. — TRANSI- TION TO PROTECTION. The system of policy sketched in the preceding chapter ) reached its full development about the middle of the \ eighteenth century. In every part of commercial legislation its principles were predominant, and had come to be regarded by practical men as unquestionable. Symptoms of dissatisfaction had, indeed, previously manifested them- selves. Both in England and France such writers as Dudley North and Boisguillebert had dissented from the efforts to encourage manufactures, and the former had insisted on the value of freedom in industrial matters. But now the opposition became more serious. The French Economistes laid down the doctrine of absolute liberty in the most uncompromising form. *' Maintain complete liberty of commerce," said their leader Quesnay ; "for the regula- tion of internal and external commerce that is most certain, most precise, and most profitable to the nation and to the state, consists in full liberty of competition." This general rule, enunciated in different ways and expanded into volumes, formed the substance of their teathing. OVERTHROW OF MERCANTILE SYSTEM. 43 Adam Smith teok the same line, and stated forcibly the advantages of the " simple and obvious system of natural liberty,'* whereby **all systems of preference or restraint" were taken away. His arguments have passed into the substance of economic teaching, and do not require restate- ment here, but two common misappr ehensions on the subject ought to be noticed, as they both tend to obscure the real nature of the movement and the agency that pro- duced it. Thus it is very commonly thought that the revolt against Mercantilism was the outcome of speculation by students of social matters — a contest of " theory " against " practice." ' The persistence of this belief is noteworthy, as it has had important eifects on the progress of the later Free Trade movement. The foundation for it is very slight. The first persons to feel acutely the pressure of restrictions were those actually engaged in commerce, and it appears from the ^^ memoires^^ of the representatives of the principal commercial towns in France (prepared in 1701) that they were in favour of freedom of commerce subject to moderate duties. One of them asserts that ^* a manufacture that can- not be established or maintained with a duty of 12% to 15% should be regarded in the same light as a man who seeks to enrich himself at the public expense." Commerce is declared to be appointed for the supply of reciprocal wants, and to seek to do without it is to go ** against nature and the decrees of Providence." These sentiments would not be out of place in much later times, and they mark the direction of wiser commercial opinion. In Scotland the merchants of Glasgow had among them advocates of freedom of commerce, who confirmed Adam Smith in his opinions. The evils of a rigorous system of restrictions on 44 COMMERCE OF NATIONS. trade are necessarily first perceived by those who suffer from it, though they may not formulate their objections in the shape of a general theory. The influence of actual conditions on the economic doctrines prevailing at a given time is now a commonplace of the historians of Political Economy. As the doctrine of free commerce seems to have arisen from practical needs, so was it supported by appeals to experience. Each part of the mercantile system was assailed by Adam Smith, not so much for its infringe- ment of natural liberty as for its prejudicial effect on the " progress of opulence," or^ as we should say, on the ** increase of wealth." To limit importation was contrary to the interests of the community ; to prohibit the export of raw materials or machinery was an injury to the particular producers engaged in those industries. Restrictions on colonial trade retarded the growth of these young societies, while they did not benefit the parent state. Another error on the subject is even more common. It consists in the belief that the free-trade policy was universally, or to a great extent, triumphant; that laissez faire became an established rule. So far is this from being the case that the system of restriction has never been entirely abandoned. Its theoretical basis has in outward appearance been changed, but at no time has there been the complete victory of free-trade which is sometimes imagined. When tracing the history of the different tariffs, we shall see how persistent, under one form or another, has been what is now known as " protection." The movement of the eighteenth century was neverthe- less a liberalizing one ; its very failures were the ground on which later and more successful efforts were built. Though most of the reforms in economic legislation were in respect OVERTHROW OF MERCANTILE SYSTEM. 45 to industry and internal trade, there were yet some advantages gained for international commerce. The revolt of the American colonies of England destroyed at a blow \ one part of the English mercantile system, and showed on I how weak a basis it rested. Another of the expedients denounced by Adam Smith— the negotiation of commercial treaties with the object of securing special advantages for the bargaining parties— was employed for a different and/ wiser purpose, viz., to remove or relax the barriers created ) by prohibitions and high duties between nations. The ^ period 1780 — 1790 is remarkable for the number of these engagements. The United States commenced their national career by seeking^^form liberal treaties with European countries. The^^^^^was with France in 1778; and after the recognition of their independence by England, they were wilUng to form a similar agreement with her. More remarkable still was the once famous Eden treaty (1786) between Ikance and England. The sharpest weapons of the restrictive system had been reserved by each of these nations for the other. " Our jealousy and our hatred of France,'' said Hume, " are without bounds. . . . These passions have created innumerable barriers and obstructions upon commerce, while we are accused of being commonly the aggressors." It has been already mentioned (p. 36) that the trade with France had been declared a nuisance, and the attempt to arrange a commercial treaty after the Peace of Utrecht (17 13) had failed to receive the sanction of Parliament, owing to the popular opposition it excited. Such trade as existed between the two countries was carried on by smugglers, who distributed the silks, wines, and brandies of France in spite of the penalties established by legislation on the subject. The Peace of Versailles 46 COMMERCE OF NATIONS. (1783) was accompanied by a stipulation for a commercial treaty, but great difficulty was experienced in getting the governments to carry out this provision by appointing com- missioners for the purpose of settUng the new duties on the different commodities. French writers usually attribute the delays to the treachery of English statesmen, though at a later time the negotiation of the treaty was regarded as a piece of British state-craft, having for its object the destruc- tion of French manufactures. Finally the commissioners were appointec^nd succeeded in arranging a definite set of duties which, though opposed in the English Parliament : by Fox and (one regrets to add) by Burke, came into force at » the end of 1786. .^^^^^ The changes ma^k^|^^^BP important. The duty on Fii III linyir^f^N^^^^^ffi less than one-half of the previous Y^^^^^fiKl^li, e. from jQ^^ to ^d^^ per tun). Brandy^rfSSe^Sj^ olive-oil, porcelain, glass, and the many -Parisian manufactures received much mJfe favourable terms. On the other hand, English textile goods, hardware, and pottery were relieved from prohibitions, and instead sub- jected to moderate duties of 10%, 12%, or 15%, according to the particular articles. The only exceptions to this, for the time, very liberal arrangement were silk on the part of England, and mixtures of cotton and wool on that of France ; both these classes of goods being still prohibited. As was hoped by the negotiators, the effect on trade was immediate. Before 1786 the English exports to France, according to French official returns, only came to thirteen million livres ; the inclusion of the contraband trade raised the total to twenty-four million livres. French exports to England were probably about the same. For the three years following the treaty the figures were — OVERTHROW OF MERCANTILE SYSTEM. 47 Year. J Eng English Exports to France. Livres. 49,440,000* ^9,913,000 60,912,000 French Exports to England. Livres ^ 34,200,000 31,100,000 35,100,000 These figures show the benefit to trade of a system of low duties, and notwithstanding the complaints of some French manufacturers, it appears that in neither country did industry as a whole suffer by the larger importations. France agreed to treaties with Holland and Russia on the same principle of generous and equal treatment. Unfortunately the period of moderation did not last long. Six years after its formation the Anglo-French treaty of 1786 was abrogated by war. It, however, produced some results on legislation. The general tariff, drawn up by the Constituent Assembly, though distinctly influenced by a protectionist bias, yet followed in its broad lines the regulations of the treaty ; there were some additional prohibitions (as, e,g.^ glass), but the scale of duties was calculated in the same way and came to about the same rate. Writing in 1852, the eminent economist. Chevalier, declared that, " Taken as a whole the \ conditions of the tariff of 1791 were very liberal. Any one who compares it with that actually in force will be surprised ^ at the enormous difference." ^X A similar disposition appeared 'in England. Pitt con-, solidated the customs laws, which had grown to an unwieldy \ ^ size, and was credited with a plan for abolishing both! | custom and excise, and thus making Great Britain a " free I ^ port." ^ V The French Revolution and the wars that arose out of it | ^\^ destroyed any hope of realizing these reforms. Fiscal necessities made the imposition of fresh taxation rather .'^ v than the removal of that already existing the matter of most \^ /6\'^'^'.>, 48 COMMERCE OF NATIONS. urgency. High duties were one of the chief resources of the financier, and native industries already pressed by tax- ation had a plausible claim for assistance against foreign competition. Besides, the natural tendency of warfare is to .-: impede commercial intercourse, since it is illegal between belligerents, and even neutrals are subjected to more rigid supervision. These features, common to all wars, were peculiarly prominent in the period 1792 — 1815. No Euro- pean state was able to avoid being drawn into the contest at one time or another, while the gross violations of neutral! rights by both England and the French Empire forced the ) United States into an attitude of hostility towards the/ aggressors. The roots of commercial policy lie deep in the past. Nations follow with curious persistence certain definite lines of conduct. To thoroughly comprehend the present situation, we must know the general outlines of earlier policies and of theories that are now given up ; but nevertheless there is little exaggeration in the assertion that it was in the time of transition from the last century to the present that the form of most existing tariff legislation had its origin. It was during it that " Mercantilism " was transformed into " Protectionism." The present is therefore a fitting place, before considering the tariff legislation of the present cen- tury, to notice the characteristics of this revised and reorganized doctrine. The key-note of protectionism is the appeal to national 7 interest. Whatever be the special doctrines that its advo- cates attach to their main idea, this is always found in a claim of patriotism from an economic point of view. So far the most ardent free-trader might agree, but protectionism adds to the idea of national interest the further belief that w OVERTHROW OF MERCANTILE SYSTEM 49 there is an opposition between the interest of the nation and that of other nations. It retains the mercantile doctrine that the two parties to an exchange do not gain, or in more extreme form, ** that the gain of one is the loss of another/* The consonance of such a belief with the sentiments en- gendered by war is apparent, and in practice the advocates of protection regard commerce rather as a field of conflict than as a process of peaceful co-operation. Many of their minor dogmas, such as the " tribute imposed by a drain of gold," " the invasion of foreign goods," " the necessity of repelling attacks on national industry," betray their warlike origin by the terms in which they are stated. As protectionism naturally arises in a period of warfare, so is it likely to be continued when that period has passed. A protracted war is itself a species of protection in so far as it makes the obtaining of foreign commodities more difficult.^ Under the cover of this natural protection various industries/ are established which become exposed to foreign compe-j tition at the return of peace. The importance of these) interests offers an inducement to the legislator to supply byj high duties on their particular products the advantage they\ have lost through peace. We shall see the action of this) force in both the French and American tariffs. The need of revenue and the demands of interested classes coincide with the sentiments created by the existence of hostilities. To conclude ; the modern protective system may be said / to have its origin in the political and economic situation ;' of the world at the commencement of the present century,; In its structure three contributing elements can be traced, viz., (i) the influence of national sentiment with the con- comitant dislike to other countries ; (2) the survival of the \ fallacies of the mercantile system in the minds of the ^ E so COMMERCE OF NATIONS. public; and (3) the urgency of special classes who are interested in obtaining advantages over foreign producers. These general characteristics are noticeable, but of course in very unequal proportions, in the legislation of different nations, though they have finally disappeared from that of Great Britain. CHAPTER VI. THE ENGLISH CUSTOMS SYSTEM, 1815 — 1860. At the conclusion of the Napoleonic war, the tax system of England was as severe as could well be ima- gined. The need of revenue had led to the imposition of high duties on most articles of consumption, and on the raw materials of industry. Foreign manufactures were in some cases prohibited, in all subjected to heavy differential duties. As long as the war continued the importation of corn was effectually checked, and at its conclusion the landed interest obtained a corn law far exceeding in rigour any earlier measure. Its declared aim was to fix the price of wheat at Sos. per quarter, which was then believed to be the ** remunerative price'' {z\e. the lowest price that would enable the British farmer to cultivate at a profit). The injustice of the distribution of taxation was increased by the rejection of the Income and Property Tax of io% that had been established under the pressure of war. Notwith- standing the enormous public burdens, EngHsh manufactures were rapidly progressing, owing to the application of inventions and the disorganization of industry on the Continent. The so-called "Continental System" of Napoleon, which was simply a commercial war, though it caused serious fluctuations 52 COMMERCE OF NATIONS. in commerce, failed in its object of crushing Great Britain. Economic forces are too powerful for the strongest despot, and England alone possessed the new implements of pro- duction that have brought about the transformation of modern industry. An elaborate contraband trade came into existence, by which manufactures were exported from England and distributed to continental consumers. The effect of the war was thus equivalent to that of a high protective tariff in England, while the foreign demand for its products was too keen to be destroyed by any hindrance. The history of the English customs since 1815 has to describe the steps by which the net-work of protective duties and commercial regulations was abolished, and the policy of protection changed into one of pure free-trade, or, if the term be preferred, into a ^^ revenue system." This extra- ordinary transformation, as we may say from ** black to white," was accomplished gradually — to carry on the parallel, a letter at a time. The study of this series of move- ments, besides its actual importance in connexion with the existing English policy, has a further value as indicating the course of future reform in other countries. However improbable it may at present seem that the high protective duties of foreign states should be modified into a pure revenue system, it is by no means so unlikely as any reform of the English tariff would have appeared at the conclusion of peace in 181 5. ( To hope for the establishment of free- trade in England was, in Adam Smith's opinion, Utopian ; and we may derive some confidence as to the future from the contradiction that facts have given to his belief. The growth of the existing free-trade policy may be I divided into three periods, with each of which the name of a ^^ distinguished statesman is connected. The first includes the \ \ THE ENGLISH CUSTOMS SYSTEM, 1815—1860. 53 reductions of duties and the removal of various restrictions during the years 1824 — 1827 ; it is naturally associated with the action of Husliissoh, who was the moving spirit in those reforms. The political agitation excited by the Reform struggle and the pre-occupation of the Whig administration with other and, at the time, more pressing measures, pre- vented progress in commercial policy until the accession of Peel to office in 1841. The great alterations made in the protective system in 1842 and 1845, as well as the abandon- ment of the Corn Laws in 1846, make the second stage in the advance towards^ thCpresent position, for which Peel was in a great degree responsible. Finally the full application in ^ all its details of the principle of free commerce to the 2^ ^^. British tariff was the work of Mr. Gladstone, accomplished 10^'^ '\ chiefly in 1853 and i860. Each period has its characteristic y""^ features, but all contributed towards the final result, and all ^''^' were needed under the existing conditions ; and it is probable that the prejudices of the people and the strength of the protected interests would not permit any quicker rate of progress. The duties on both raw materials and manufactures exist- ing in 1820 were so high as to now appear almost incredible. ■^Thus raw silk was chargedsx'^^ 7 J^. per lb. ; wool, which^' ^ ■ had formerly been imported free, was first made subject A^-' J- to duty in 1803, and by 18 19 the rate had risen to 6^. per lb. Timber, so important an element in the cost of build- ing, was taxed 65^. per load, the inferior Canadian wood being admitted at the nominal rate of 2s, 6d, Salt, the basis of various chemical products, was charged 15^. per bushel; tallow, hides, and other similar articles were taxed with equal severity. Foreign manufactures met with still worse treat- ment. Duties, amounting in some instances to prohibitions, 54 COMMERCE OF NATIONS. and ranging from 40% to 180%, hindered the growth of im- ports. Sugar, the staple product of the West Indian colonies, was charged differently according to the place of production. West Indian, ^os. per cwt. ; East Indian, 375. per cwt. ; foreign sugar, the enormous amount of 63^. per cwt. French wines and brandies, as well as tea and coffee, were all placed under heavy burdens. Wine from France was subject to 1 3 J. S^d. per gallon; Peninsular wine escaped with 95*. i^d,; French brandy paid 22s. 6d. per gallon; the tea duty was over 100% ; that on foreign coffee 2s, 6d. per lb. Though many of the commodities could not possibly have been produced at home, and therefore the duties on them would not at first appear to be " protective," yet, as they encouraged the employment of substitutes and in all cases checked con- sumption, and thereby indirectly the increase of exports, they were contrary to economical as well as fiscal policy. Besides, the colonial producers were unduly favoured, with results far from encouraging to those who would advocate a revival of the system. The duties protecting agriculture give another illustration of the general policy. The Corn Laws, with practical prohibition until the price of wheat reached Sos. per quarter, have been noticed before, but other agricultural imports were heavily taxed. Bacon, 285. per cwt. ; butter, 20s, ; cheese, loi*. 6d, ; lard, Ss. ; potatoes, 2s. The smallest and most insignificant articles did not escape — peas, hemp- seed, madder, are examples. The enumeration of separate instances brings home the fact of the determined application , of restrictions to British trade in all its departments. J There is no exaggeration in the description given by New- march. " At that time (1820) the system of prohibition, pro- tection, and fiscal confusion was at its height. It was said by competent authorities that the number of Acts of THE ENGLISH CUSTOMS SYSTEM, 1815— 1860. 55 Parliament relating to the entry, export, and custody of goods as matters of Custom House supervision, was not less than fifteen hundred. All the special interests were in \ full possession of the vested rights to which they laid claim. There was the Corn Law of 181 5 ; there were the differential duties in favour of the West India proprietors ; the mono- poly of the East India Company ; the rigorous application of the Navigation Laws against competition on freights. There were heavy duties on raw materials of industry, and pro- hibitive or extravagant duties on foreign manufactures." It was to be the task of enlightened statesmanship to | destroy the system so described. The first impetus to^ reform came from the petition or the Merchants of London f for Free Trade, presented to Parliament in 1820. Thisj remarkable document, which contains in very narrow compass \ a vigorous statement of the argument for free commerce, was drawn up by Mr. Tooke, and signed by several persons, who however were not fully capable of seeing its practical wisdom. The parliamentary inquiries into the position of the finances assisted in propagating more liberal ideas, and prepared the way for Huskisson's measures when he took the post of President of the Board of Trade in 1823. During each year of office he succeeded in carrying! some needed reform, and many of the most important] industries were affected by the new policy. The whole sys- tem previously applied to the silk trade was altered ; the duties on imported raw and thrown silk were reduced, the former first to 3^., then to id., per lb. ; the prohibition on imported silk manufactures was turned into 'an import duty of 30% ; the bounties on exportation were given up ; and the arrangement of the industry was placed on a more natural basis. 56 COMMERCE OF NATIONS. The duty on imported wool was lowered to id. per ib., ^ the prohibition of its export being changed into an export duty of the same amount. Another step in the directir'*i of freedom of "commerce was the removal of the dutie on trade between Great Britain and Ireland, which completed the commercial union of the three kingdoms. Besides the substantive changes in the customs, a careful consolidation of the numerous and conflicting statutes was carried out, the whole unwieldy mass of rules being reduced to eleven Acts. The effect of these measures was seen in the increased consumption of commodities, while the prote red industries, and particularly the silk trade, did not suffer as much as had been apprehended. The death of Lord Liverpool and the disruption of the ministry closed this stage of commercial reform. From 1827 to 1842 the advance was insignificant. The Corn Laws were changed in 1828, but though the price at which \ free admission was allowed was somewhat lower — 731. 1 per quarter — their effect was quite as mischievous as 1 before. Even after Huskisson's reforms, the operations of English commerce were sadly hampered by the many duties still retained. Parnell's Financial Reform^ which acquired ad- ditional value from being the production of a statesman thoroughly familiar with the course of the commercial policy of the time, places the existing evils in a strong light. The duties on raw materials are shown to restrict several useful industries, and are declared to have the effect '* of deranging the natural course in which labour and capital would be employed, productions extended, and the wealth, comforts, and enjoyments of the community increased." The pro- hibition to export machinery is condemned as destructive THE ENGLISH CUSTOMS SYSTEM, 1815—1860. 57 to the export trade that would certainly arise were it removed. With respect to the high taxation of such articles of general consumption as wine, tea, coffee, etc., we learn that, '*as the effect of these high duties is in some cases to I diminish the revenue, and in all to create smuggling, and further, by greatly diminishing the importation of the articles 1 on which they fall, to diminish the demand for and the exportation of our own manufactures, they are exceedingly injurious, and ought to be reduced." Finally, the number and pressure of the protective duties on both agriculture and manufactures are clearly brought out Above all, the course of future fiscal reforms is indicated in the separation between the productive and non-productive taxes. Sir H. Parnell takes up the English revenue of 1829, amounting roughly to about ;^5o,ooo,ooo. Of this amount about ;^6, 000,000 was obtained by the objectionable duties on raw materials, ;^2, 000,000 by the protective duties on manufactures, and about ;^3, 000,000 by the excessive taxa* tion of foreign spirits and tobacco. The remaining revenue of over ;^38,ooo,ooo was levied in a fairly prudent and economical way. The removal of the former classes of duties would, he admits, leave a temporary deficiency which could be met by retrenchment of expenditure and the imposition of an income-tax, while the yield of the taxes retained would be much increased through the improvement of industry and trade. The fiscal working of Huskisson's policy had confirmed his views. "The abatement of revenue by taxes remitted would have been in 1827, as compared with 1823, no less than ;^9,i82,57i ; it proved to be only ;j^3,3o8,3i6 ; the difference of ;^5,874,2 55 being the increase of revenue from increased consumption.'' How-fruitful the application of this principle 58 COMMERCE OF NATIONS. has been in English finance will appear in the history of the later reforms. It is plain that the measures of the period 1823 — 1827 were merely preparatory. So far as they went they gave confirmation to the theoretical arguments of free-traders by refuting the assertion that protection was needed by British industries. But the great bulk of the restrictive regulations continued in force, leaving an ample field for the profitable application of the policy so admirably and convincingly set forth by Sir H. Parnell. The second period of reform is coincident with the administration of Peel from 1841 to 1846, and was, in fact, largely due to his efforts. To those whose acquaintance with the course of commercial policy is limited to the result of the Corn Law struggle, this statement may seem surpris- ing. The services of Cobden and Villiers will occur to them as far more efficient than those of Peel, who might not unreasonably be regarded as an opponent of free commerce, converted, as statesmen too often are, by the force of necessity. Such a view is, however, superficial. The Corn Laws were undoubtedly the stronghold of the protected interests with the main props of the West India and shipping industries; the wisest policy for the agitator was to assail the " Corn Law as," in Cobden's phrase, " the foster-parent of all other monopolies." The tax on food imposed in the interest of a wealthy class was, moreover, the most unpopular part of the system, and the one against which public opinion could be most readily excited. But to persons trained in the study of fiscal questions and disposed to weigh with care the possibilities of success in carrying legislative measures, a class to which Peel eminently belonged, the minor articles of the tariff would seem more promising THE ENGLISH CUSTOMS SYSTEM, 1815— 1860. 59 | objects of amendment. The system of import duties hadi t been fully examined by a Parliamentary Committee in 1840,! 1 which collected a body of evidence that is said to have I powerfully impressed Sir R. Peel. The evidence showed that 1 150 different items were enumerated in the list of dutiable goods, besides some forty coming under general heads; that in 1838-9, 349 articles produced in the aggregate only\ ^^8,050 j that, on the other hand, nine commodities yielded I ;^i8,575,ooo out of a total slightly exceeding ;^22, 100,000, or six-sevenths of the total receipts. For the year ending . Jan. 5th, 1840, the net produce of the customs was I ;^'22, 962,610. Of that amount ten commodities produced/ ;^2o,87i,i36j six other .commodities, 1,147,148. Thus, speaking broadly, sixteen articles contributed over ;^22,ooo,ooo, while all the other customs duties gave less I than ;^i,ooo,ooo. Examined in detail, many of the items yielded so little as to excite ridicule; e.g. in 1839 — 1840: crystal beads, subject to 28^. 6d, per 1,000, gave is, *jd, ^3,^ revenue; extract of vitriol, subject to 25% duty, 125. 3^.; ^ starch, at a duty of fy los, per cwt., li*. 9^.; Bruges thread, charged 15J. per 12 lbs., only i^. 3^. The accumulation of facts of this description, set forth ^ 1 gravely by skilled official witnesses and emphasized by the 1^ report of the Committee expressing " their strong conviction | of the necessity of an immediate change in the import duties I 'of the kingdom," was the immediate cause of the reform off ; '1 842. Without touching the Corn Laws, it was possible to remove the minor duties that were the outposts of the pro- tective system. Peel himself stated the general principles upon which he proceeded. Put shortly, they were— (i) the 9 removal of all absolute prohibitions and the change of pro- f hibitory duties into lower ones; (2) the reduction of duties! ^ ^ 6o COMMERCE OF NATIONS. on raw materials to a nominal amount ; (3) half-manufactured articles to be admitted on payment of moderate duties ; and (4) the admission of full manufactures, subject only to such duties as would allow of fair competition — e, g, generally about 20%. The timber duty was considerably reduced, and the differential rate on foreign timber lessened ; coffee was treated in like manner; and the more oppressive duties on raw materials — ^.^. those on indigo and turpentine — were completely remodelled. In all 750 articles were aifected by these changes. The results were found to accord with the expectations formed by the minister. There was a steady recovery in the revenue from customs, and trade improved under the stimulus of the remissions. The success of the new policy emboldened ministers to proceed further in the same direction. In 1845 a still more radical revision of the tariff was carried out. Four hundred and fifty items disappeared altogether. Raw materials were the chief objects in this list. Among them were raw silk, hemp, cotton, hides, and most of the articles whose taxation was condemned by Parnell in 1830. The differential duties on sugar — that from slave-holding countries excepted — were diminished. Customs duties, estimated at ;^3,6i4,ooo, the larger part of which pertained to sugar, were surrendered by this measure. The number of heads of duties was reduced nearly one-half — from 1150 to 590. The steady progress in tariff reform, which we have just noticed, was overshadowed in the popular mind by the Corn Law struggle. It was useless to point out to the more advanced free-traders that substantial improvements had been made. The Corn Laws, the Navigation Acts, and the THE ENGLISH CUSTOMS SYSTEM, 1815— 1860. 61 favours to colonial producers by the differential duties on sugar and timber, still remained, and it was against them that the attack was directed. How long the contest might have continued under ordinary circumstances we cannot say. The bad harvest of 1845 and the Irish Famine brought on a crisis. Peel, already convinced of the soundness in principle of free-trade, and having seen the advantage of the with- drawal of protection from manufactures, recognized that the time had come for applying the sound principle without , reservation to every branch of commerce. The sentiments created by the teachings of the Anti-Corn Law League completed his conversion. The practical consideration that these laws once suspended could never again be enforced in the face of the opposition, settled the question, and accordingly the Act of 1846 provided that for three years the maximum duty per quarter should be loi*., falling, as the price rose above 485"., till, at the price of 53J. per quarter, the duty would be only 4^". At the end of three years there was to be only a fixed registration duty of is, per quarter. The passage of this law closed the history of the protective corn duties, as, despite some feeble attempts in 1851-2, there never has been any question as to the necessity of free-trade in the most essential article of food. The fate of the Corn Laws entailed the removal of the colonial and shipping privileges. . The differential duties on foreign timber had already been lowered, and in 1847-8 the rate on foreign timber was fixed at 155., while colonial timber came in at the very low rate of is. But the completion of the reform was delayed. Slave-grown sugar was placed on an equality with other foreign sugar in 1846, and provision was made for equalization of the duties on all sugars to take place in 185 1, 62 COMMERCE OF NATIONS. Great as was the importance of both the landed and colonial interests, the shipping industry had both historically and politically perhaps superior claims. The Navigation Laws have been traced as far back as the fourteenth cen- tury, and had been maintained continuously since 165 1. As a political measure they had won the approval of Adam Smith, and had long been regarded as one essential condition of British naval supremacy. Huskisson's reciprocity measures made the first break in the system, which was abolished in 1849 for the foreign trade and in 1854 for the coasting trade. Thus the term British ship — which had previously been conferred only on vessels built in the British Islands whose captain and three- fourths of whose crew were British subjects, and whose owner was also British — was extended to all vessels satisfying the last-mentioned condition. The completion of each of s these reforms lies outside the period under notice, but im- ! portant steps involving the final result were taken as regards ■ all of them in the period 1840 — 1850. The second Peel administration (1841 — 1846) had carried on the work begun by Huskisson : it had realized the plans of Parnell and the proposals of the Committee of 1840. It had further been forced to recognize the power of the Anti-Corn Law movement, and by the mouth of its leader had done tardy justice to Cobden and his colleagues. It is plain that the conversion to a liberal commercial policy was gradual. It was not on the authority of general principles that the reforms of 1842 and 1845 had been brought forward. One member of the Government, who was intimately acquainted with the motives of its commercial policy, and who was afterwards to carry them to their legitimate results, has placed this on record — " I am a THE ENGLISH CUSTOMS SYSTEM, 1815— 1860. 63 deliberate adherent," wrote Mr. Gladstone in 1845, *' of that policy which is described in contemptuous terms as halting between two opinions — between the opinion which regards commercial restriction as being permanently and essentially a good, and the opinion which deals with it as an evil necessarily greater than that of a sharp and violent transition to freedom." It is in virtue of belonging to this transitional period of commercial policy that the measures of the second stage of reform have acquired their characteristic marks. The success of the free-trade measures, as judged by the"\ broad test of the national prosperity that followed them, 1 acted as an impressive object-lesson in economic practice. | Free-trade passed into a maxim to be carefully observed by statesmen. Instead of cautiously feeling the way towards a system that would permit the best employment of the national resources, it became possible to boldly examine the mass of existing legislation, and to test each item by its accordance or non-accordance with the rule of free industry and trade. To make the first breach in the protective system had been Huskisson's task ; to take away the founda- tions of that policy by introducing a large free-trade element 1 was the service rendered by Sir R. Peel ; to apply the new / principle of legislation in its fullest extent, and to bring the i still very complicated customs system into harmony with it, | \ was the work reserved for Mr. Gladstone. y\^ This last stage of fiscal reform was, like the second, carried out in two instalments — the first in 1853, the second in i860. After the final defeat of the protectionists and the overthrow of the Derby ministry in 1852, Mr. Gladstone became Chancellor of the Exchequer. His first Budget speech an- nounced " something like a new revision of the general rates," guided by the following rules : viz. (i) to abolish, unless in 64 COMMERCE OF NATIONS. exceptional cases, unproductive duties ; (2) to likewise abolish duties on half-manufactured articles ; (3) to reduce duties on finished manufactures to 10° j^, the silk duty being exceptionally retained at i57o^ (4) to make duties specific instead of ad valorem; (5) to as far as possible get rid of differential duties ; and (6) to lower duties on articles of food of general consumption. The application of these principles freed 123 articles from duty, reduced the rates on 133 more, and besides on several minor articles of food — apples, nuts, eggs, oranges, lemons, raisins, cocoa, tea, butter, and cheese. The customs tariff became simpler and more easily understood, while finally a good many of the existing remains of protection were cleared off. The Crimean War interrupted the course of improvement, as war usually does ; seven years elapsed before the finishing touches could be given, and the new policy placed in harmony with the whole fiscal system. The Budget measures of i860 were more comprehensive even than those of 1853. The duties on food commodities that had been reduced in 1853 were now abolished, with the exception of those on cocoa, tea, and dried fruits. The differential duties on trade disappeared ; so did the last protective duties on manufactures, the 5°/^ on woollen and i57o on silk manufactures being given up. "There will be," said Mr. Gladstone, "a sweep — summary, entire, and absolute — of what are known as manufactured goods from the face of the British tariff." The differential duties on foreign wines and brandies were removed, and provision was made for a future lower scale of rates in respect to light wines. One consequence of such extensive alterations was the attainment of a simplified customs system. Each step towards reform had struck off a good many items from the THE ENGLISH CUSTOMS SYSTEM, 1815— 1860. 65 list, but the fixing of specific rates for most articles (in itself advantageous) had somewhat checked the diminution. In 1842 the number of articles chargeable was 1052; by 1853 it had fallen to 466; in 1859 to 419. The^reform of i860 brought the number of commodities (omitting subdivisions) to 48. Even of this reduced list onlyjKeen were productive of revenue, five being taxed to balance^ties on similar home products, and several others on account of their resemblance to the '* primary " commodities. Five of the fifteen leading commodities — spirits, sugar, tea, tobacco, and wine — pro- duced more than ;^i, 000,000 each; four — coffee, com, currants, and timber — between ;^2oo,ooo and ;^ 1,000, 000 each ; and the remaining six — chicory, figs, hops, pepper, raisins, and rice — between ;^2o,ooo and ;^2oo,ooo each. During the thirty years that have passed, the list has been further reduced; hops (1862), pepper and timber (1866), corn and rice (1869), sugar (1875), were taken out of the class of dutiable articles. The completion of the free-trade reform was probably hastened by the negotiation of the famous French commercial treaty, the examination of which we have reserved to the present. The long-protracted hostilities of the Revolutionary and Napoleonic wars had put back the commercial relations of France and England to the situation of the seventeenth century ; the tariffs of both countries were practically pro- hibitive of other than contraband trade. Huskisson's measures, particularly his treatment of silks and wines, were calculated to remedy this position. Unfortunately French policy was, as we shall see, rigidly protective. A reciprocity treaty as to shipping had been concluded in 1827, but no other steps were taken to place the com- merce of the two countries on a more liberal basis until F 66 COMMERCE OF NATIONS. PeeFs second administration. Between 1842 and 1845, various attempts to form treaties on the reciprocal principle were tried without success. In response to the reductions of duties in England in 1842, the French duties on linens were largely increased. The effect of this policy was proved by the very trifling amount of English manufactures ex- ported to France — ;^263,ooo in value, besides ;^2 17,000 of machinery — in 1858. The efforts of Cobden and Chevalier, aided by the prudence of Napoleon III. and his most influential advisers, resulted in the treaty of i860, by which terms, not indeed so favourable for England as those of 1786 but still of great service to commerce, were obtained. The reduction of the duties on wines and brandies and the abolition of protection to manufactures were part of the English stipulations ; those of France belong to the commercial policy of that country. It is noticeable that while in form the treaty was based on reciprocal concessions, England in reality surrendered no- thing; she simply continued the development of her policy on its settled course. There were, moreover, none of those con- ditions for exclusive advantage that marred the older treaties. Thug., at length -the free-trade principle became the sole guiding rule of English commercial policy. It had taken forty years and the best endeavours of a distinguished series of statesmen to reach this point. Nothing, therefore, can be more erroneous than to regard the existing system as the product of haste or panic. If any criticism is justifiable, it is that there was undue delay in the appUcation of recognized principles. We can hardly over-estimate the benefits that the tariff of i860 would have been to the England of 1825. The long and bitter contest between the landed and manu- facturing interests would have been avoided ; the growth of THE ENGLISH CUSTOMS SYSTEM, 1815—1860. 67 the larger English industries would have been more rapid ; the colonies would have been saved the shock that the with- drawal of their privileges after so many years undoubtedly inflicted on them ; and, most important of all, the spirit of retaliation would not have been aroused in other countries, nor could the plea have been made by foreign protectionists that it was by restriction that England became fitted for and able to endure free-trade. Newmarch has shown that the delay in the Corn Law repeal from 1842 to 1845 was alto- gether an evil, and his statement may be extended to the whole period of reform. What was done at the end might have been done at the beginning if only the legislature had been wiser. The time and labour expended on the English tariff enable us to understand the difficulties of commercial reforms elsewhere. Nothing but the special position of British industries and the peculiar relations of the different sections of the population made it possible to remove the favours possessed by so many producers. When conti- nental writers object to the case of England as evidence for free-trade, they may be, and are, mistaken on the question of national interest ; but they have abundant justification for\ the belief that the measures of our English statesmen! were directly applicable only to the United Kingdom, and/ cannot be mechanically imitated by other countries. / In tracing the progress of reform we are in danger of forgetting the broad principles of which the various and com- plex enactments were the expression. The more enlightened statesmen, so early as 1820, accepted in theory the doctrine of free exchange, whatever qualifications or modifications political exigencies might compel them to allow in practice. The evidence of facts brought it home to those interested in 68 COMMERCE OF NATIONS. industry that the best hope for progress lay in the opening up of fresh markets for manufactures and a reduction of the expenses of production (the prix de revieni, as the French happily call it). Hence we have the leading canons of our modern commercial policy. They are — (i ) Complete freedom of raw materials from taxation. To enhance the cost of the articles used by the labour and capital of the country for further production is to handicap the industries of export and weaken industrial power, con- sequently this rule was the earliest reduced to practice. (2) Freedom of the means of subsistence. Whatever diffi- culties may be raised as to the relation of wages to cost of production and to price, the broad fact remains that an increased price of the articles of the labourer's consumption must either raise his money-wages proportionally or lower his real wages. On the former supposition the employer's gain is diminished ; on the latter the labourer's efficiency suffers. Therefore the removal of all artificial impediments to the supply of food and labourers' necessaries was an essential part of the general scheme; the repeal of the Corn Laws was the greatest and most important instance of its application. (3) Abandonment of all protective differential duties on manufactures or so-called articles of luxury. This is perhaps the least readily intelligible part of the free-trade policy. Raw materials or food have a plain and strong claim to exemption, but special taxation of gloves, silks, wines, or of the innumerable miscellaneous manufactures may appear to only touch the rich man and to benefit the labourer. This, however, is not really so ; in the first place raw materials shade off by degrees into manufactured articles; the finished product of one industry is the raw material THE ENGLISH CUSTOMS SYSTEM, 1815— 1860. 69 of another. Again, fully manufactured articles are often essential conditions in production, as appears most plainly in respect to machinery. A modern industrial estab- lishment requires a multiplicity of articles, and gains by getting them on the cheapest terms. Finally there is no hard-and-fast line between the " luxuries " of the rich and the consumption of the poor. The labourer's standard of comfort is not a fixed one, and the cheapening of luxuries opens their use to a wider class. As Mr. Gladstone has remarked, " You may make tea or sugar or any other article of consumption the rich man's luxury if you only put on it a sufficient weight of duty." In regard to its social effects, there was no better part of the new system than its avoidance of all attempts to hinder the use of foreign manufactures. (4) Adoption of a simple and intelligible tariff. The advan- tage of confining duties to a moderate number of articles is that it relieves trade from a great deal of the difficulties and restraints that attend customs supervision. There is no trouble in learning the rates of duties or in following their changes. No questions arise as to the exact duty on each particular article, the cost of collection and the pressure on commerce are diminished. Study of American tariffs will show conclusively the evils that complication produces. The absence of distinctions between colonial and foreign imports, and also of privileges to British shipping, materially assist the operations of commerce. English commercial policy is thus essentially free-trade, and for comparison with the effects of other systems of regulation it may fairly be taken as a type. CHAPTER VII. THE UNITED STATES TARIFF AND COMMERCIAL POLICY. r The contrast between English commercial policy and that \ adopted by other countries is very decided, and nowhere is \ it more so than in respect to the United States. The I reasons for this divergence of practical methods in the case [ of two countries connected by so many ties are partly \ historical, partly the result of differences in environment. The natural tendencies of the American colonies, suffer- ing as they did from the old colonial system with its many hindrances on trade, would, it might appear, have been towards complete freedom of commerce. It is quite possible that under favouring conditions this would have been the course adopted. But the very defep feeling of hostility towards England; the bejief that the industries unduly retarded by the colonial system^ required some com- pensating encouragement; and, lastljf, the pressing fiscal necessities of the new Government, combined to bring about the establishment of a moderate tariff on imported goods. The first tariff of the Federation was framed under the influence of Hamilton, who, in his famous Report on Manufactures^ laid the basis of the later protectionism. The rates were, however, so low as to act chiefly as revenue duties, but they were increased by degrees. THE UNITED STATES COMMERCIAL POLICY. 71 More effectual than this nascent protection was the position in which the United States was placed. At first the European wars opened up a splendid market for American producers of food and raw materials, of which they largely availed themselves, as the increase in exports shows. Imports of English manufactures formed the readiest and most satisfactory mode of payment. As neutrals, the United States obtained a considerable share of the carrying trade, in spite of the English Navigation Laws. The continental system of Napoleon (1807), and the English Orders in Council (1809)— both of them gross violationsjofLiiitgmaUo^M^^ — stopped this rapid develop- ment. Both the imports and exports, as well as the carrying trade, fell off after 1808. Foreign markets for the flour, timber, and other materials in which a new country had special advantages were closed at first by illegal restric- tions, and from 181 2 by the hostile British fleet. The import of foreign manufactures suffered similarly, with the natural result that native industries sprang up, producing goods to meet the unsupplied demand. Here, as so often elsewhere, we see that war is in reality the extreme limit of protection so far as the belligerent countries are concerned. On the conclusion of peace with England in 18 14, and the European settlement of the following year, these " infant industries " were exposed to the competition of the English manufacturers, and were handicapped by the superior advantages of the " extractive " industries (/. e. those engaged in the production of food or raw materials). For their relief the tariff of 181 6 imposed duties on imported goods. Cotton and woollen manufactures were charged 25% for three years, after that date 20% ; iron about 20%, and other manufactures somewhat less. In 18 15 a reciprocity treaty 72 COMMERCE OF NATIONS. as to shipping was concluded with England, and was a pattern for the later treaties of Huskisson. During 1818-19 American trade passed through a time of depression, ending with a crisis in 1819. The protectionist sentiment was strengthened by this event, and after an abortive attempt at legislation in 1820, a higher tariff was passed in 1824. The duties on cotton and woollen goods were raised to 33^%, on raw wool from 15% to 30% ; corn, lead, and hemp were also charged at higher rates, the average rate being 37%. Not satisfied with this victory, the advocates of protection pressed for further increase of duties, and by skilfully utiliz- ing the contending political parties, they succeeded in pass- ing the tariff of 1828, by which the duties on raw materials — wool, flax, hemp, and iron — were raised, speaking generally, to about 50%, with an additional specific duty in the case of wool. Woollen goods were charged 40%, to increase to 50%, with minimum rates for the lower qualities. The duty on molasses, the basis of the rum manufacture, was doubled; the average rate of duties was increased to The Southern States, which were opposed to the exag- gerations of the protective system, questioned the right of Congress to vote protective duties. South Carolina, under Calhoun's guidance, proposed to '' nullify," or render inoperative, the tariff of 1828; and when this difficulty was got over, the Tariff Act of 1832 made reductions in the duties, but retained the chief protective ones with some modifications — e,g. the tax on pig-iron was lowered from 12*50 dollars to 10 dollars per ton ; the revenue duties were lowered, as on silk, or removed, as on tea and coffee. Notwithstanding such slight concessions, the tariff remained decidedly protective, the average rate on imported dutiable THE UNITED STATES COMMERCIAL POLICY. 73 articles came to 34%. The powerful free-trade interests of the South were not satisfied, and their pressure led to the "Compromise" tariff of 1833, by which it was arranged that a gradual reduction of the high rates should take place in the next nine years, until they reached the fixed point of 20*^/0 ; the reductions, slow at first, and at intervals of two years, were to be large and rapid toward the end, and were to be completed in 1842. Thus by the process of "horizontal" reduction, as it was called, the permanent duties of the old tariff of 18 16 would have been re-established. The years 1837-9 were a time of severe industrial disturbance, both in England and the United States. Numerous bank failures and a great fall in prices revived the agitation for higher duties. In 1842 a fresh measure was passed, which may be described generally as a return to the rates of 1832, though in some particular cases slightly lower ; it gave an average charge of over 30% on dutiable articles. Pig-iron paid 10 dollars, hammered-iron 17 dollars, and rolled-iron 25 dollars per ton; woollen goods 40%, wool three cents a pound, and 30%. This scale of duties did not remain long in force. A victory of the democratic party led to the passing of the comparatively liberal Act of 1846, prepared by Secretary Walker. The arrangement of the rates of duties was completely altered. Commodities were grouped in eight schedules, and a separate rate was fixed for the goods in each schedule. The duties varied from 100% to 5°/o, and on the average came to 25;^. Though often described as a " free-trade " measure, it is plain that it was really one of qualified protection, not much superior to the English system before PeeFs reforms. Thus iron and- metal, raw or manufactured, wool and woollen goods, were in the third class and paid 30% ; cotton goods in the fourth 74 COMMERCE OF NATIONS. schedule only 2^°l^, In 1857 additional relaxation of pro- tection was granted. Articles in the third class and cottons were henceforth only liable to 247o ; some raw materials were even admitted free of duty. The average rate fell from 25% to 2o7o> and remained in force till the commence- ment of the Civil War in 1861. Taking the whole period from the establishment of the Constitution (1789) to the Civil War, it appears that, starting with almost nominal duties, there was a tendency shown in the tariffs of 18 16 — 1824, and of 1828, to bring them to the point of high protection. From this point there is an opposite movement till 1842, when the protective policy takes a fresh start, which is soon checked, and the low duties continue till the close of the period. At no time was there any such system as " free-trade '' in the English sense. The articles on the free list varied in number, and in many cases there were no similar native productions, so that the duties were not in practice protective ; but there could be no question that considerable encouragement was always given to some important branches of manufactures, notably the cotton, woollen, and iron industries, and this aid was particularly effective in the case of the lower qualities of goods, to which the home production was mainly confined. The plan of imposing minimum rates of duty, in combination with a general ad valorem rate, had this effect — thus in 18 16, the duty on cottons was 257o) but all cotton goods were to be taken as at least 25 cents per yard, and therefore liable to 6 J cents duty. In 1828 the minimum valuation was raised to 35 cents, and soon after the price of coarse cottons was only 8| i cents, the duty being 8| cents or over ioo7o- The mixing ' of specific and ad valorem duties on a single article was another way of attaining the same object. In 1842 the duty THE UNITED STATES COMMERCIAL POLICY. 75 on raw wool was placed at three cents per pound and 307© of the value, an evident favour to the coarse American wool. The Civil War proved a decisive turning-point in fiscal policy. The revenue requirements led to an extravagant and oppressive system of taxation on both home and foreign goods. Almost every article was taxed, in many cases at every stage of its production, and to compensate native producers extra charges were put on imported goods. Just before the outbreak of the war the tariff of 1861 had established higher duties on wool and iron. The Act of 1862 raised the average rate on dutiable articles to 37%, the more extreme measure of 1864 to 47%. When, however, we remember that the concomitant internal taxation was heavy, in a few cases exceeding the import duty on the commodity, and that the cost of transport was less than formerly, these duties were not in practice as protective as' the nominally lower rates of 1824 and 1828. The great industrial progress of the country acted in the opposite direction ; duties that would have been simply high revenue duties in the early part of the century, were now protective of the newer manufactures, and of the already firmly-estab- lished branches of the older ones. It is impossible to expect a careful consideration of complicated economic questions in a national crisis, when every possible mode of procuring resources has to be tried j and therefore the high war duties had the plea of necessity for their justification. At the close of the struggle in 1865, the position of the United States, so far as taxation and debt were concerned, had much similarity to that of England half a century before. In each case there was great complication and severity in the tax system, which fell on many com- 76 COMMERCE OF NATIONS. modities that affected the ordinary life of the people. An- other parallel occurs after the peace. Great Britain gave up the Income Tax instead of moderating her indirect taxes. The United States commenced reductions with the internal revenue. The effect was to increase the amount of protec- tion to the extent of the repealed internal taxes on consump- tion. The woollen industries, depressed after the close of the war, asked for further aid, which they obtained in 1867. Some minor changes were carried out in succeeding years. The revenue duties on tea, coffee, sugar, wine, and the protective duty on iron, were reduced in 1870; and in 1872 the tea and coffee duties were removed, and a general reduction of 10% of the protective duties was made ; but this percentage was replaced in 1875. A new tariff measure, based on the report of a commission, but often departing from its proposals, was passed in 1883. 'Apparently intended to reduce the excessive charges on imports on the ground " that a substantial reduction of tariff duties is demanded, not by a mere indiscriminate popular clamour, but by the best conservative opinion of the country," in some directions it increased the existing rates, and left the great bulk of duties untouched. Iron received a very small reduction: steel rails were taxed at $17 instead of $28 per ton; the duties on wool and woollen goods in general were also reduced ; but in some of the finer classes, both of wools and cottons, there were actually increases. Linens of finer quality were lowered from 40% to 35%. The legislation of 1883 did not succeed in settling the question of tariff reform, which increased in prominence on account of the large amount of surpluses that the existing duties brought in. Two opposite modes of meeting this THE UNITED STATES COMMERCIAL POLICY. ^^ difficulty were proposed, viz. (i) that of the protectionists, which would remove a sufficient number of revenue duties, leaving the protective ones untouched, and (2) that of the sup- porters of " tariff reform," who advised the placing of most raw materials on the ** free list," and a proportionate reduction of the duties on manufactures. After several failures in the attempt to procure agreement between the two houses, the results of the election of 1888 enabled the former party to carry the Tariff Act of 1890 (usually known by the name of its proposer, Mr. McKinley). In its general character this measure was decidedly protectionist : though the duties on some articles were reduced, or even repealed (as e,g, in respect to raw sugar). The rates on such important classes as wool and woollen goods, metals and metal manufactures, and finally agricultural products, were seriously increased. As examples of special classes of goods treated with extreme severity, the finer linens and laces, ready-made clothing, and tin plates, may be given. The apprehensions excited in European countries as to the evil effect on several branches of trade of so rigorous a measure were soon dis- pelled by the remarkable revulsion of feeling in the United States in consequence of the great rise of prices that speedily followed. The election of 1892 placed the Democrats in power, and as that party was pledged to the cause of tariff reform, a somewhat conservative Tariff Bill was introduced, in December 1893, and rapidly passed through the lower House, under Mr Wilson's guidance. In the Senate its course was less prosperous: its most important provisions for reform were reduced, and such was the effect of the Senate's hostility that, after the usual reference to a con- ference, the " Wilson " measure, as finally enacted (August 1894), could hardly be regarded a breach of the protective 78 COMMERCE OF NATIONS. system. Some duties were placed at even a higher point than that fixed by the Act of 1890, and a very large part of the tariff was substantially unchanged. The most important reform was the placing of wool on the free list, a privilege also conceded to flax, but not extended to iron-ore or coal, which were, however, admitted at a lower rate. The con- cession of free wool permitted the adoption of a simple ad valorem scale of duties on woollen manufactures. Slight reductions were made on silk, linen, and cotton goods ; and the heavy duty imposed by the McKinley Act on tin-plates was reduced one-half; on the other hand, raw sugar was subjected to a 4°/^ charge. China and earthenwares may be noted as articles that received the benefit of decided reductions. The Tariff Act of 1894 was even shorter-lived than its predecessor of 1890. The Republican victory in the election of 1896, evidenced in the election of Mr. McKinley as President, was followed by the passage of the Dingley Tariff Act of 1897, which made a decided return to higher protection. Raw wool was again placed under taxation; so were hides, which had been free from duty since 1872. Duties on manufactures were raised nearly to — in some cases higher than — the level of the Act of 1890, steel rails receiving an exceptional reduction. Specific duties were imposed on both raw and refined sugar, the latter being placed so high as to give protection to the manufacturers. There seems, however, to be little doubt that further adjustments of the tariff will be needed, owing to the heavy expenditure that the war with Spain will involve. Increased duties will probably be imposed, but rather to obtain war revenue than to give still higher protection. The general influence of war in favouring the increase of duties which THE UNITED STATES COMMERCIAL POLICY. 79 cannot easily be removed on the return of peace, is an element that requires to be taken into account. The tendency of policy in the immediate future is therefore quite uncertain. The preceding review of the stages of more than a century of tariff legislation brings out the principles that have been gradually developed in the United States as to commercial policy. The contrast they present to the British system,. described in the preceding chapter, is truly remarkable, as will be even more readily perceived by /^stating them in the form of propositions, which will run ( ^^as follows : — (i) Native industries are entitled to reasonable pro- tection against foreign competition. (2) A customs tariff is the most convenient mode of raising revenue, and preferable to internal taxation. (3) Unmanufactured articles of general consumption — tea, coffee, sugar, &c. — should be either admitted free or very lightly taxed. (4) Raw materials may fairly be taxed, the native manu- facturer who works them up being compensated by an additional import duty on his product. (5) Imported manufactured articles are peculiarly fit subjects for high taxation, since the foreign producer suffers by the dtities which help to encourage home industry. (6) The scale of duties has to be determined, not simply with reference to the revenue required, but, too, with consideration of the protection needed by the several industries. (7) As a consequence, the tariff can be neither uniform nor simple; it must include numerous articles, yielding little or no revenue, and it must attempt to dis- criminate between commodities that closely resemble each other. 8o COMMERCE OF NATIONS. Each of these principles may be illustrated from any of the United States tariffs, from the so-called free-trade one of 1857, as well as from the protectionist ones of 1828, 1864, 1890, or 1897. The least authoritatively established is the fourth. It seemed at times as if raw materials would escape duties; but wool, after a brief exemption, has been replaced on the list of dutiable imports, and its example has helped to keep other objects in the same position.J The presentation of definite principles, as exem- iplified in tariff legislation, is in one way misleading. It /suggests that the system of duties is the result of careful [and well-planned arrangement. To say that it is always [the outcome of compromise would be nearer the truth. ) Every Tariff Act has turned on the struggles of sectional or industrial interests; the South against New England \and the West in the earlier periods; after the war the claims of the various large industries. The final result is 0. mixture of conflicting aims that seriously detracts from •the effective working of the measure. \ Writers of opposite opinions on the question of the best commercial policy are agreed on the existence of this evil. " The history of tariff- making," says Mr. Bolles, "is not particularly honourable in all its details to any party or interest ; it has too often partaken of a personal fight by manufacturers against the public and each other." This feature of American tariffs is so obvious that it deserves to be stated as a part of their history rather than as a criticism. In another respect the United States are differently situated from England. The latter country has adopted a free-trade policy, and is resolved to adhere to it ; the former has preferred protection, but it is impossible to say how long she will retain that preference, or in what ways she will in THE UNITED STATES COMMERCIAL POLICY. 8i the future apply it. Protective systems differ much in their effects and operation, and a great deal depends on the particular form that a country chooses. Some kinds of protection are comparatively inoperative. The course that America will take in this matter is of deep practical interest to European nations. CHAPTER VIII. THE REFORM OF CONTINENTAL TARIFFS, 1815 — 1 865. The French Revolution, and the movements that followed it, effectually broke up the old European system. This transformation was not confined to political conditions. Economic life came under new influences. The old method of government, and the " liberalism " that assailed it, had both to be modified in order to fit them for the changed position of society. The long continuance of war had in some cases checked commerce, and in more driven it into indirect channels. Exports and imports were both open to the high-handed in- terference of the French and the very strict regulations of the English. Many industries in continental countries attributed their existence to the advantages that the continental system had given them, and now that peace was restored, claimed the aid of the state against foreign competition. The sudden influx of English manufactures was regarded as a serious danger, only too likely to happen unless sufficient precautions were taken against it. The course pursued by European statesmen for the period 1815 — i^^o is only explicable by bearing this circumstance fully in mind. The development of the dijfferent tariffs shows how it operated. THE REFORM OF CONTINENTALI TARIFFS. 83 To begin with the country that would appear peculiarly fitted for the closest trade relations with Great Britain — France — ^we find that at the close of the war in 18 14, the duties then levied (fixed in 1806) favoured the woollen and cotton industries ; in other respects they followed those of 1791, already mentioned (p. 47). Commerce with England was prohibited by the war, and dealing in EngUsh goods was a violation of the decrees of Napoleon ; but an extensive contraband trade existed, and licenses were freely given which permitted traffic in the otherwise forbidden com- modities. At the Restoration some slight modifications were made, but they were only temporary. The protec- tionist spirit was strong in the Royalist party, as the Corn Laws of 1819 and 182 1 (which established a complicated sliding scale on the English model), and the tariff of 1822, showed. The industrial and commercial depression, then so general, coi^ributed to bring about the increase of the duties on foreign sugar, cattle, flax, wool, and many smaller articles. In 1826 an aggravation of the protective duties was -carried, the charge on wool being raised to 30%, that on steel to 100%. J|ffiie Orleanist Government succeeded in getting a moderate r^pction of some of the most oppressive duties, but was unable or unwilling to change the main parts of the system, which remained rigidly protective, the import of certain important goods being altogether prohibited. Between 1840 — 1850 there were even some increases of protection due to the pressure of the interested producers. The first serious attempt to alter this very severe restrictive system was reserved for the Second Empire. The English reforms of Peel proved the possibility of removing most of the barriers to commerce that legislation had set up, g4 COMMERCE OF NATIONS. and consequently Napoleon III. entered with moderation on the work of revision. Between 1853 and 1855 the duties on coal, iron, steel, and wool were lowered, as also those on cattle, corn, and various raw materials, the require- ments for ship-building being allowed in free. The legis- lative body was, however, with difficulty brought to consent to these measures. A more extensive proposal — made in 1856 — to remove all prohibitions on imports, while retaining protective duties of 30% on woollen and 35% on cotton goods, had to be withdrawn, in consequence of the strong opposition that it excited. The interest of the consumers was in the popular opinion entirely subordinate to that of the iron-masters, cotton-spinners, and agriculturists — one of the many instances which shows that the long continuance of high duties does not facilitate the introduction of free competition, v It was under such discouraging circumstances that the famous Commercial Treaty of i860 with England was yC' negotiated. This important measure (the work of Chevalier and Cobden, but owing a good deal of its success to the efforts of the Emperor and M. Rouher), though only a finishing step in English tariff reform (p. 66)^ inaugurated a new era in France. All prohibitions of imports disappeared, and were replaced by protective duties not to exceed 30% (this maximum ultimately to descend to 25%). The rates, first determined by the value, were to be converted into specific duties by a later convention. The working out of these details was managed by Cobden, whose vivid account of the troubles of his task recalls to mind the similar diffi- culties that impeded the application of the treaty of 1786. It is, however, curious to notice that in several points the later treaty was less liberal. Nevertheless it placed the THE REFORM OF CONTINENTAL TARIFFS. 85 commercial intercourse of France and England on a new footing, and led to a rapid growth of trade between them. A further advantage was the initiation of a policy, that was so largely followed by other countries that the European states were gradually bound together by a network of treaties, securing a lower scale of duties. The operation of the '^rnost favoured nation" clause, as it is called (by which the contracting parties bind themselves to give each other whatever privileges may be given to any third power), was most effective in this respect. A reduction of duties, granted by one state in respect to the goods imported from another, was applicable equally to all countries having treaties. Accordingly the *' conventionar' or treaty tariff became quite distinct from the general tariff, which was only effective when there was no treaty — an exceptional case. The reforms of the French Government were not confined to those accomplished by treaty regulations. T^ie same sentiments that brought about the concessions to foreign countries of a more moderate scale of charges on their goods led to amendments by direct legislation. Some of the worst parts of the protectionist system were removed. The Corn Laws, with their complex sliding scale and division of the country into different regions according to the supposed cost of producing wheat, had been so inconvenient in practice that they were frequently suspended; but in 1861 the bolder step of complete repeal was taken, and a nominal fixed duty of 60 centimes per 100 kilos (3^. per cwt.) was imposed instead. The duty on cattle was similarly treated, an Imperial decree to that effect being confirmed by legislation in 1863. The broad general effect of these measures was the transformation of the very severe system that the Restoration 86 COMMERCE OF NATIONS. had established into one of low duties and moderate pro- tection on manufactures. The economic result was a large increase of both imports and exports, the former of which rose from 1641 million francs (;^65, 600,000) in 1859 to 3153 million francs (;^i 26,000,000) in 1869, while the latter grew from 2266 million francs (;^9o,6oo,ooo) in 1859 to 3075 million francs (;^i 23,000,000) in 1869 — that is, a total increase in ten years nearly approaching ;^i 00,000,000. Manufacturing industries were special gainers, owing to the reductions or abolitions of duty on the most important raw materials. The commercial policy of France would naturally have a powerful effect on the smaller neighbouring states, but we find that some of them had preceded her in the commencement of reform. Thus, though Sardinia up to 1849 was strongly protectionist, the influence of Cavour altered this attitude, and a series of measures in 185 1, 1852, and 1853 softened the rigour of the previous regulations. Agricultural products and various raw materials were subjected to moderate charges, or allowed ito enter in freedom. The expansion of Sardinia into the kingdom of Italy enabled the same policy to be applied to the whole country, most of which had been previously regulated as to duties by Austria. Holland, which had been under the protective regime till 1847, in that year followed England in repealing its corn laws. It abandoned its special duties on foreign shipping in 1850, and carried out a general tariff reform in 1854. Belgium at the same time made similar progress in the direction of freedom, giving up corn laws and reducing differential duties in 1850 and 1852 ; in 1856 the differential duties were removed, and in the following year raw materials were admitted free. Switzerland had no general tariff until THE REFORM OF CONTINENTAL TARIFFS. 87 1849, when as a result of the constitution of the preceding year a uniform scale of duties was arranged, but without protection. Portugal had carried out several reforms in 1852, and even Spain in some degree departed from the prohibitive duties that were imposed previous to 1849. The effect of the Anglo-French commercial treaty was to stimulate further action in the same course. Treaties were concluded by Belgium with France (1861) and England (1862), a course followed by Italy in 1863. Spain was .slower in adopting a liberal policy, and her relations with England were specially affected by the higher rates charged in this country on the strong Spanish wines. The first step towards reform was made by Figuerola's administration in 1868. The situation of Germany, or rather the German States, was in such sharp contrast to that of France that the development of commercial policy almost necessarily differed widely. The turning-point in German commercial policy was the formation of the Zollverein, or Customs Union, which was the first step towards national unity/ This league commenced with the smaller unions of Prussia, and Hesse Darmstadt (1832), Bavaria, and Wurtemberg (1828), and Hanover, Brunswick, and Oldenburg (1834). By 1833 the central portion comprised a population of over 25,000,000, and the most important states of the Germanic Confederation (Austria excepted). Its original scale of duties was based on the moderate Prussian tariff of 181 8, which made import duties the chief source of the customs revenue, export dues being lowered. ' By it protection to manufactures was Hmited to 10%, besides a uniform duty of IS. 6d, per cwt. on all goods, and therefore heaviest on cheap and bulky articles. Within the Customs Union 88 COMMERCE OF NATIONS. protectionist sentiments soon became noticeable. The adoption of a national policy was advocated by a section having List, the founder of so-called scientific protectionism, for its leader, but the necessity for unanimity among the states in order to carry any change tended to preserve the old duties. In 1842 certain alterations in the direction of higher protection were made, the duties on cotton yarns were raised, and pig-iron, previously free, was subjected to 20s. per ton. The maintenance of the English Corn Laws encouraged this movement as a form of retaliation on England for her exclusion of the raw materials produced in Germany. The course of events after 1850 tended to weaken the protectionist feehng ; and in 1853 numerous reductions were carried out in connexion with a commercial treaty with Austria, by which the whole German territory of the time received the advantage of comparative freedom of commerce. The tendency towards free-trade was strengthened by the Anglo-French treaty, which enabled the advocates of a liberal commercial policy to secure the adoption of a like engagement between France and Prussia (1862), finally extended so as to include the whole Zollverein (1865). In the latter year a treaty was also negotiated with England. As a result, the whole tariff of the league was reformed. The general import duty of i^. dd, per cwt. was removed ; so were the duties on corn and other agricultural products ; on wood, and on many manufactures and chemicals. In fact, the new tariff was a large instalment of free-trade. Up to 185 1 the Austrigii tariff, regulated by the measures of 1822 and 1838, had been of a restrictive character; but the general current of Hberal sentiment then led to the above-mentioned treaty with the German Zollverein^ and THE REFORM OF CONTINENTAL TARIFFS. 89 though the engagement lapsed in 1862, the existing policy of low duties was continued. The Russian Empire had been long notorious for the extremes to which the protectionist system had been carried. A slight reduction of duties in 182 1 was followed by a sharp rise in 1823, which was maintained by the advice of the finance minister Count Cancrin, whose writings evidence the connexion between the old mercantile system and the newer protectionism. In 185 1 and 1855 some concessions were made to the necessities of foreign trade; however, no serious inroad on the existing barriers was attempted. In the foregoing brief outline of European tariff history \ it is easy to see the working of general forces. Protection — \ in many cases prohibition — was the rule for the first part of the period, Prussia and Switzerland being the only noticeable exceptions. About 1850 a more liberal influence is perceptible. Reductions of duties become, so to speak, fashionable. Every country is examining its regula- tions and seeking to revise them. The French treaty is a kind of landmark, as being the adoption of a new method of reform, and its extension places the tariff systems of Europe, in a great degree, on a new basis. As a result, four general principles of commercial policy are for the time recognized in (i) the abandonment of prohibitions, (2) the almost complete relief of raw materials from duty, (3) the fixing of moderate duties on imported manufactures, and (4) the surrender of discrimination against particular countries. Though the result was not (as is often imagined) the attainment of pure free-trade, it was of the utmost import- ance for European progress. The growth of commerce and the development of industry were not indeed due to 90 COMMERCE OF NATIONS. this or to any single cause. A number of agencies were together in operation — the expansion of the railway system and of steam navigation, the new supplies of gold, and the more liberal commercial policy. Each contributed its share to the final result, and it is difficult to assign the separate pro- portions ; but there is little rashness in conjecturing that the part of the last-named was not the smallest. Improved means of transport are of little use if they are off-set by artificial hindrances, while the stimulus of increased stocks of the precious metals is at best temporary. The opening up of a wider area of international trade has a permanent effect proportional to the extent of the new field added. / To realize more fully the rapidity of the formation of new treaties, we may take the particular case of France. Between i860 and 1867 she concluded fourteen treaties, viz., with England (i860), Belgium (1861), Prussia and the ZoUverein (1862), Italy (1863), Switzerland (1864), Sweden and Norway, the Hanse towns, Mecklenburg, and Spain (1865), Holland, Portugal, Austria, and Japan (1866), the States of the Church (1867). When we remember that each of the other nations had an equally long list, we can understand the effect produced. r^ The growth of liberal sentiments was evidenced not only by reductions of import duties, but by relaxations of other forms of restriction. Greater facilities for the transit trade (or movement of foreign goods through a country) were granted, as well as for the storage of imports for ultimate re-export. The old Navigation Laws were, as we have noticed, entirely repealed or greatly modified, and such colonial trade as the continental states possessed was placed on a more liberal footing. The bounty system was curtailed with great financial benefit. THE REFORM OF CONTINENTAL TARIFFS. 91 In fine, we may say that partly by treaty agreements, but also in part by independent national legislation, the protective system was changed, not with the same vigour or thorough consistency as marked English policy, but still, considering the difficulties that popular sentiment placed in the way, with considerable judgment and very decided advantage to the economic interest of the countries concerned. /^' Another feature of the political development of Europe that assisted the advance of commerce was the widening of the areas to which the customs systems applied. We have seen one notable instance in the German Customs Union ; another was the establishment of Italian unity. A less obvious consequence of these changes was that while freedom of intercourse was increased, foreign com- merce in the narrow sense was in some respects less necessary. In the present state of industry, a small territory is compelled to draw its supplies of many articles from outside. A large and populous nation is not. France, Germany, or Russia could at need obtain most of what is absolutely requisite for their wants from their own areas. All the leading industries of modern life are represented in each of these states, and the natural desire of producers to control the home market obtains a plausible basis in the capacity that they possess of meeting the national demand for their products. This, among other circumstances, has aided the reactionary movement that is a characteristic of the present time. The reforms, political and economic, of the half-century from 181 5 have thus in part supplied the material for a partial reversal of the policy on which they were founded. CHAPTER IX. EUROPEAN TARIFFS (1865 — 1 8 90). — THE PROTECTIONIST REACTION. The more ardent free-traders believed that the adoption of their system by England, and the large portion of it extended to other countries by the treaties described in the last chapter, marked a definite step in the progress of economic policy. Protectionist ideas were thought to be obsolete and fated to disappear before the diffusion of sound ideas on the nature of commerce. The course of events during the last twenty years has given a rude shock to these sanguine anticipations. Far from winning new ground, the upholders of commercial freedom are compelled to fight for what has been previously gained, and a survey of exist- ing tariffs shows a general rise of duties over those of 1865. The causes of this change are various and differ in different countries, but some stand out so prominently that there is little trouble in detecting them. First of all the wars that have been a conspicuous feature of the period tended to limit the former liberal policy. National sentiment is aroused by warfare, but unless enlightened beyond the existing standard of popular knowledge on economic matters, EUROPEAN TARIFFS, 1865— 1890. 93 it desires to encourage, as it thinks, native industries by excluding the products of the foreigner, who is or may be an enemy. Warfare is, besides, under modern conditions extremely costly, and high customs duties, with accompanying protection, are the easiest way of gaining the requisite supplies. The exigencies of finance give support to the sentiment of protection. How important this influence is will appear from later details ; it is, generally speaking, true that the need of fresh revenue is a condition precedent to an increase of protection^' ^''Another and more special cause has also worked in the same direction. At no former period has the development of the resources of new countries been carried on with equal vigour and success. New fields of supply for the markets of Europe have been opened up, with the necessary result of reducing the cost of agricultural products much below the former level. The advantage to consumers is undeniable, but the immediate loss to pro- ducers is also great. In particular the classes interested in agriculture have suffered from a depreciation of their land and capital that has placed them in serious difficulties. The widespread economic dislocation that has been pro- ceeding for the last twenty years has, along with many benefits, brought some disadvantages. In a large modern nation it is hopeless to expect that production will be all at once adjusted to economic changes, but without rapid adjustment some loss is inevitable. Thus the agricultural depression, very general in Europe, has led to a strong feeling in favour of meeting the evil by removing its proximate cause, which is believed to be the importation of foreign " food-stuffs." What facilities of transport and extended cultivation have done for agriculture, the progress of mechanical invention 94 COMMERCE OF NATIONS. and of business organization has done for manufactures. The methods of production and the system of conducting business are both worked at a higher speed and subjected to much more severe competition from abroad ; the old practical monopolies possessed by special localities or countries have become merely advantages that are precarious and retained only by care and energy. Countries in which neither agriculture nor manufactures are highly developed are therefore exposed to a double pressure; they cannot compete with success in foreign markets, and in their own a fall of prices is necessary to enable their comparatively superior industries to hold their ground. In such a case the imposition of duties to protect industries all round is the most obvious way (to the popular mind) of meeting the evil, and until its real effects are impartially examined, it possesses a certain plausibility. As movement in a given direction continues after the original impetus is withdrawn, so we shall see that in some instances the progress of reform was persisted in to a very recent time, and that the decided protectionist reaction dates only from about 1877, though of course it was earlier in some countries than in others. The Franco-German War (18 70-1) and the overthrow of Napoleon III. at once arrested the free-trade policy, which had little support in the national mind, and was hardly understood outside the small circle of French econo- mists. The need of fresh revenue was imperative, and M. Thiers, the most prominent of French statesmen, was notori- ously protectionist in his leanings. Pure revenue duties on colonial and Eastern commodities were first tried ; the sugar duty was increased 30% > that on coffee was trebled ; tea, cocoa, wines and spirits, were all subjected to greatly in- EUROPEAN TARIFFS, 1865— 1890. 95 creased charges^ As the yield thus obtained did not suffice,, proposals for the taxation of raw materials were brought forward but rejected by the legislature in 187 1, when M. Thiers tendered his resignation. To avoid this result the measure was passed, not however to come into operation until compensating protective duties had been placed on imported manufactures. The existing commercial treaties were a further obstacle to changes in policy, and accordingly negotiations were opened with England and Belgium, in order that the new duties might be applied to their products. As was justifiable under the circumstances, the former country required that if imported raw products were to be taxed, the like articles produced in France should pay an equivalent tax, and there- fore, as the shortest way of escape, the French Government gave notice for the termination of the treaties (in the technical language of international law " denounced " them), and new conventions were agreed on ; but as this arrangement was just as unsatisfactory in the opinion of the French Chambers, the old treaties were in 1873 restored to force until 1877, and thus the larger part of the raw materials escaped the new taxation. The protectionist tendency was, too, manifested in the departure from the open system introduced in 1866 in respect to shipping. A law of 1872 imposed differential duties on goods imported in foreign vessels, with a charge of three francs per 100 kilogrammes (is, 3^. per cwt.) on goods in store for export, besides a so-called quay duty. A plan for a series of export duties failed to pass, but a statistical duty of id. on each package, ton of goods in bulk, or head of animals, either imported or exported, was carried, with the ostensible object of defraying the offici:^.! 96 COMMERCE OF NATIONS. expenses. The advance of the sentiment in favour of a return to the restrictive system was even more decidedly- indicated in 1 88 1. Bounties were then granted for the encouragement of French shipping, and extra taxes imposed on indirect imports of non-European and some European goods. In 1889 the carrying trade between France and Algiers was reserved for native ships. The revision of the general tariff was a more serious task, undertaken with a view to influencing the fresh treaties that the termination of the old engagements made necessary. The tariff of 188 1 (to come into force in 1882) made several increases and substituted many specific for ad valorem duties. Raw materials escaped taxation \ half-manufactured articles were placed under moderate duties. The nominal corn duties were diminished by a fraction, but the duties on live stock and fresh meat were considerably increased, oxen from 35". to I2X. per head, sheep from 3^. to i^. 8^., and other animals in proportion ; fresh meat from 3^. to \s, 3^. per cwt., while salt meat was slightly reduced. A new " conventional" tariff speedily followed in a series of fresh treaties with European countries. Agreements with Belgium, Italy, Portugal, Sweden, and Norway were con- cluded in 1 88 1, with Spain and Switzerland in 1882, and with Servia in 1883. The Austro-French treaty of 1879 was continued, and a convention for " most-favoured nation " treatment on each side was signed by England and France in 1882. Germany continued to receive the same privilege by the treaty of 187 1. The duties on whole or partially-manufactured goods remained substantially unchanged by the new treaties, which do not, in fact, vary so much from the general tariff as was previously the case. The number of articles EUROPEAN TARIFFS, 1865— 1890. 97 included in the conventions had been reduced, and all countries outside Europe came under the general code. The reaction against the liberal policy of i860 was thus as yet very slight, and did not seriously affect manufactures. The agricultural depression was the primary cause of the legislation of 1885, which placed a duty of 3 francs per quintal on wheat, 7 francs on flour, 2 francs on rye and barley, and i franc on oats, with additional duties on indirect importation. Cattle, sheep, and pigs came under increases of 50°/^ to 100°/^ — e,g, the tax on oxen was raised to jQi per head; that on pigs from 2^-. 6d. to ^s. y sheep to 2s. 6d. As this measure did not bring about the expected relief, most of the duties were raised still higher in 1887 — wheat to 5 francs, oxen to 305. per head, sheep to 4^. ; fresh meat to 1 2 francs for 100 kilos. A more decided step towards protection was made by the measure of 1892, under which two scales of tariff were arranged, the lower one to apply to those countries only that should conclude commercial treaties with France. Even this "conventional" tariff was much higher than the former rates, and agricul- tural products were excluded from it. The policy of commercial treaties was thus discouraged, and a return was made to the system of differential duties. In succeed- ing years there have been many special increases of duties, so that we may justly describe the existing condition as one of high protection chiefly in the interest of agriculturists. Germany did not quite as speedily come under the in- fluence of the economic reaction as France. The moderate 98 COMMERCE OF NATIONS. 7j}llverein tariff of 1865 (p. 88) became the law of the North-German Confederation, and further remissions were granted in 1868 — chiefly affecting cotton, linen, and iron — and again in 1870. In 1873 raw iron was altogether exempted from duty \ and the rates on machinery were at once lowered, with the condition that they were to cease altogether in 1877. This important series of reforms was evidently due to a desire to copy English economic legislation. The currency, banking, and commercial laws of the new German Empire were closely modelled on the system of the leading com- mercial state of Europe, with the hope of rivalUng her success. The treatment of import duties had the same motive. If England owed her supremacy to her gold standard, her Bank Charter Act, and her free-trade policy, Germany might hope to attain the like position by the same methods, or at least succeed to the vacant place of France in the European economic system. The endeavour to act on this theory was, however, short- lived. England had other advantages in her progress to commercial greatness than those derived from her policy, and the situation of the German Empire was very different in this respect. The time, too, was unfortunate for bold experiments in economic legislation. The great industrial depression that existed in Central Europe from 1873 to 1879 reduced the profits of business and the receipts of the state. The distress was generally attributed to the absence of sufficient protection against the agricultural products of Russia and America, and the manufactures of England. A new tariff was therefore passed in 1879, i^ which financial and protectionist aims were combined. A large number of commodities, hitherto free, became subject to duties — iron EUROPEAN TARIFFS, 1865--1890. 99 raw and manufactured, machinery and railway plant, wood for building, horses, cattle and sheep, also corn and flour. The subsequent steps were very much the same asr those already given in the case of France : the corn duties — one mark per 100 kilos, (or 6d. per cwt.) on wheat and rye in 1879 — were trebled in 1885, ^^^ further increased to five marks in 1887. In 1881 flour and some classes of woollen goods were charged more, and up to 1892 the protectionist movement continued. Since then there has been a note- worthy modification shown in the conclusion of a series of commercial treaties with the neighbouring continental states, France, however, being a significant exception. Apart from the vexed question of the sugar bounties, Germany has confined her action to taxation of imports. Export and transit duties were abolished in 1861, and have not been revived. Both agriculture and manufactures have, as in France, received protection against foreign competition with so little benefit that fresh increases have been demanded by producers. Itahan commercial poHcy also altered for the worse. From the formation of the kingdom till 1875, as the various com- mercial treaties and the general tarifl" of 1861 show, it was liberal and tending towards freedom. About the latter date the forces that we have indicated above as operating generally throughout Europe, commenced to aflect Italy. The public expenditure had largely increased, and additional revenue was urgently required. Agriculture was so depressed that, though the country is pre-eminently agricultural, alarm was excited by the supposed danger of foreign competition. The result was that on the general revision of duties in 1877 much higher rates were imposed on the principal imports. The duties on cotton yarns were raised 20%, and for some loo COMMERCE OF NATIONS. of the finer goods even ioo%. Those on fully-manufactured cottons and linens were increased 50%. Various iron manufactures had to submit to still greater increases, steel ^ rails being particularly selected for taxation in order to encourage their manufacture at home. Soon after the adoption of this general customs law, treaties of commerce were concluded with France, and became applicable to England by the " most-favoured nation " clause. Depression both in agriculture and elaborative industries continued and strengthened the protectionist party, who succeeded in securing the abandonment of all the commercial treaties, and the enactment of a new tariff in 1887. As a preliminary, a full inquiry was made by a Commission ; but in spite of a general recognition of the sound principle that taxation should be only for revenue, the practical recommendations, which received the approval of the legislature, were distinctly protectionist. Wheat, flour, sugar, coffee were placed under higher duties. Cotton, linen, and iron goods had increases varying from 20% to 200%, according to the quality of the articles, imposed on them. The first effect of the new system of high taxation with no conventional privileges was to lead to a war of tariffs between France and Italy. Increased duties on both sides acted immediately on the volume of trade carried on by these neighbouring countries. A decline in the imports and exports on each side marked the year 1888, which also witnessed a new growth of the contraband trade that had decUned under the low duties after 1S68. The formation of new treaties with Austria, Switzerland, and Spain has somewhat modified the Italian duties; they, however, still remain much higher than formerly, and financial requirements will hardly allow of a speedy reduction. EUROPEAN TARIFFS, 1865— 1890. loi Austria _m ay be added to the list of countries in which the protectionist reaction has been effectively shown. The new general tariff of 1878, combined with the expiration of the commercial treaties, placed heavier duties on cotton, woollen, and silk goods; and still further changes in the direction of in- crease came into effect in 1 882. A third general tariff in 1 887 — though some of its effects were softened by the treaties since concluded with Italy and Switzerland — carried on the same policy. Cotton yarns and tissues, woollen yarn, railway loco- motives, and hardware are the chief heads on which duties have been raised. In Austria proper the manufacturing interest is strongly protectionist, and Hungary has suffered sufficiently from American and Russian competition in food products to desire the closing of the home market against these oppo- nents. The conclusion of a commercial treaty with Germany in 1892 has improved the trade relations with that country. In Russia the revival (or perhaps it would be more correct to say contmued existence) of protection is decisively marked. So early as 1868 some duties had been raised, though others at the same time had been reduced. The war with Turkey was followed by a decree making the customs duties payable in gold ; and as the Russian currency was nominally silver, but really depreciated inconvertible paper, this change was equivalent to an increase of all duties variously estimated from at 30% to 50%, and of course depen- dent from time to time on the premium on gold. In 1880 duties were raised 10%. Since then a very large number of changes, nearly all in the direction of higher duties, have been made. The new tarrifif of 1882 made many duties specific instead of, as formerly, being proportioned to the value, and in 1885 further increases of from 10% to 20% were imposed. As the outcome of these measures, the 102 COMMERCE OF NATIONS. Russian tariff is now on the whole the highest in any great state ; before 1885 it was probably equalled by those of Spain and the United States, which now are less rigorous. Spain and Portugal had long been strongholds of pro- tectionist ideas, and the reductions made under the influence of the examples of other countries were not as important as elsewhere, but were continued to a later date — thus the Spanish tariff of 1882 made several reductions. The United King- dom in particular was excluded from the advantages of the conventional rates in consequence of its supposed unfair privileges to French wines. This obstacle has fortunately been removed, and since 1889 the "most-favoured nation" treatment has been extended to British imports into Spain. Portugal had yielded the same point some years earlier. But though this particular obstacle has been removed, the pressure of present necessity and the strong protectionist sentiments of the people have led to an imitation of the French policy. Duties have been considerably raised, and the older commercial treaties have been "denounced" in order to escape from any engagements hindering further increases. Holland and Belgium have as yet adhered to the system of moderate duties. Next to England they may claim a place as free-trading countries, the duties on manufactures being limited to such low rates as 5% or 10%, ad valorem, Switzerland is also, comparatively speaking, liberal, though the new duties of 1888 show some serious increases — cotton yarns pay 75% over the former duty, cotton tissues 40°/^, and ready-made silks 5o7o. The protectionist reaction in other countries, especially France, Germany, and Italy, is the avowed reason for the advances. The Swiss policy is thus rather " fair-trade " than protectionist in its motives ; but in practice the result is the same. It is thus very apparent from the course of tariff changes EUROPEAN TARIFFS, 1865— 1890. 103 during the last twenty years that the general movement is in the direction of greater restrictions on foreign commerce. The smaller as well as the larger powers have felt this influence. Even Sweden and Norway have tried to protect the linen and iron industries in the face of the obstacles that those manufactures meet through the absence of coal or a skilled population. The general conditions that have led to this state of things have been already noticed, and we have only to notice some further circumstances that are not quite evident, but nevertheless have to be taken into account, in judging of the effects on commerce. In the first place, it is often said that after all the new tariffs are not so rigorous as those prevailing before i860, and compare very favourably with the almost prohibitive duties of 1850. As a general statement the assertion is true, though in some cases rates are now higher than ever ; it does not therefore follow that the position of international trade is better than it was thirty or forty years ago. A new economic system has been created in the intervening period, on which even lighter duties have a depressing effect. Com- mercial transactions at present turn on the attainment of small gains on each exchange, and an additional duty of 57o ^^y destroy this advantage and shut out the particular branch of industry from a former market. As the process of exchange is necessarily double, and involves imports sufficient to balance exports, a check to the export of a product leads indirectly to a reduction of imports and a smaller volume of trade. To compute the total loss that the tariffs of the several European states inflict in this way is impossible, though its amount is beyond question considerable. As the higher economic development of modern times i04 COMMERCE OF NATIONS. increases the evil of high protective tariffs, one of the most salient features of that development comes to act in allevia- tion of the evil. The barriers that high duties build up are speedily broken through by the better facilities of transport. Railways and steamships have reduced the charges on exchange more than recent tariffs have increased them ; the obstacles to commerce are on the whole diminished ; and the amount of trade is growing, as also increasing in com- plexity and variety. The losses from protective duties are not thereby removed, their pressure is only diminished or rather disguised ; but in their absence the increase of trade would be greater in proportion as they really attain their object. In another respect such restrictions are more injurious to commerce than ever. Formerly it was limited to articles of high value in proportion to their bulk, and these were usually confined to special regions; the consequence was that either the duties were purely revenue ones, since there was no competing home production, or they were altogether evaded by means of contraband trade. Now, when cheap and bulky articles are the principal materials of commerce, there is often a home industry of more or less importance, and smuggling on an extensive scale is quite impossible. Silks, fine cloth, rare wines, and spices are much more easily carried, can bear heavier duties, and may be concealed with comparative impunity. Raw cotton and wool, corn, meat, and iron, the staples of modern trade, are strongly contrasted in all these respects. Taxation at apparently moderate rates, added to the cost of transport, is almost prohibitive, and evasion of the charge is hopeless. These articles are, moreover, either auxiliary in the production of more highly-wrought articles, or form the necessaries of the EUROPEAN TARIFFS, 1865— 1890. 105 working population ; in either case increase in their cost detri- mentally aflfects industrial development by reducing profits, or, still worse, lowering the labourer's standard of living. Though the special economic circumstances of a time of transition have led to a general disregard of this injurious operation, it is almost certain that in the future it will command increasing attention. CHAPTER X. COLONIAL AND OTHER TARIFFS, When questions of international commerce first came to be considered in a scientific spirit, attention was chiefly directed to Europe. Non- European countries had long been regarded as appendages of the political and commercial system that had been developed by the states of Europe. Colonial policy was an important part of state-craft, inas- much as it was a mode of increasing national power and supplying resources for warfare. The colonies and depen- dencies were simply passive materials to be manipulated for that end. As we have seen (p. 45), the American War of Independence gave a decisive shock to this part of mercantilism, and prepared the way for the present entirely different situation. The change was, however, only brought about by degrees. The revolt of the American colonies of Spain (1809 — 1824) overthrew the other great colonial empire regulated by much more rigorous methods than could possibly be employed with English settlements. In reorganizing her territories after the creation of the United States, England had to deal with possessions conquered from other countries, with slave-holding and convict settlements. Many of the old restrictions on trade were COLONIAL AND OTHER TARIFFS. 107 maintained, but under the new circumstances they were favourable rather to the colonists, or at least the owners of colonial land, than to Great Britain. Such colonial products as timber and sugar received special treatment, while the competing countries had to pay much higher duties. The colonial interest was as strong a support of protection as the agricultural interest itself. The triumph of free-trade in England deprived the colonies of this questionable privilege. The emancipation of the slaves (1834) seriously affected the sugar-producing territories, which had now to compete on equal terms with foreign producers, while their cheap labour was removed. Still more important was the complete change in colonial policy adopted by the mother-country. In 1840 the Canadian troubles were settled by the Union Act, under which the two Canadas became a single province with a "responsible Government" — i.e, the executive, as in England, held office by the will of the majority of the elected legis- lature. The policy of this measure, which has been well described as " the principal event in our modern colonial history,'' was extended by degrees to the Australian colonies between 1850 — 1860, and to the Cape in 1872. The far- reaching political effects thus produced do not concern us here, but the right of self-government inevitably carried with it the right to raise revenue in the mode that appeared best to each colonial administration, even when it involved the imposition of duties on British products. It is possible that if the course events would take had been foreseen, arrangements might have been made by which the Home Government would have retained an effective control ovei the tariff legislation of the colonies, though the exercise of such a power would have been highly unpopular and likely io8 COMMERCE OF NATIONS. to lead to disputes. The new system of colonial indepen- dence was the growth of circumstances, and accompanied by a very general belief that the existing relation was but a resting-place on the way to separation. The concession of responsibility for internal government was therefore hampered by no restrictions as to regulations of commerce (except that forbidding the imposition of discriminating duties in the case of colonies coming under English com- mercial treaties). Every self-governing colony obtained full power over its own commercial policy. At first the system of low import duties solely for revenue purposes was adopted. Indeed, there was no reason for any other course. Manu- factures claiming assistance were not in existence. Great Britain had recently become converted to free-trade, and the cost of government was small. In the natural progress of colonial society all these conditions changed. Immigration brought in a large number of artisans, who expected to find the same class of work as that which was open to them at home, and the influx of capital ted to the starting of various industries that were not disinclined to get exclusive control of their home market. The United States, Canada's most influential neighbour, and regarded all the world over as the model of a new democratic society, passed a series of severely protective measures (chap, vii.), and with the extension of state functions, public expenditure increased rapidly in all the self-governing colonies. These various causes (together with the influence of the economic theories to be presently noticed) have in most cases changed the low revenue tariffs, mentioned above, into much more com- plicated customs systems, with varying, though in no case prohibitive, duties on many kinds of manufactured goods. There is, moreover, the remarkable fact that colonial pro- COLONIAL AND OTHER TARIFFS. 109 tectionism has, like that of the Continent, gained ground in recent years, and this notwithstanding that the economic conditions are altogether different in the two cases. Nothing but very deeply-rooted forces acting over a wide area can account for this agreement. Nevertheless, these general causes operated in special ways in the different colonies. At the commencement of her self-governing career, Canada (/. e. the two provinces of Quebec and Ontario) found herself in difficulties, owing to the restrictions placed by the United States on her agricultural exports. As usual, "revenge in this case naturally dictated retaliation," and the provincial legislature was with difficulty dissuaded by the English Government of the day from trying the effect of counter-restrictions. The wiser expedient of a reciprocity treaty, by which mutual privileges were granted to both parties, was employed in 1854. The Canadian tariff was increased in 1859 for revenue purposes to, on the average, 2o7o) imposed on the great bulk of imported manufactures. This increase of duties, together with the effects of the Civil War (186 1 — 1865) on the industry of the United States, tended to stimulate the growth of manufactures. The reciprocity agreement was denounced by the United States in 1865 on the ground that it allowed of Canadian protection while it precluded the taxation of Canadian raw products exported to the States. The Canadian Dominion (formed in 1867) lowered its tariff to 15% in 1868. The great industrial depression of 1873 and the succeeding years was heavily felt by the manufacturers of the Dominion. They complained of American competition, while they were shut out by the very high tariff of the war period (chap, vii.) from sending goods into their rivals' territory. The advocates of a no COMMERCE OF NATIONS. "national" policy succeeded in passing a new tariff in 1879, by which duties were largely raised. The several yarns were taxed from 15% to 25%, besides, in the case of cotton and wool, specific duties per lb. Tissues paid in some cases as high as 30%, iron 8^. 4^. per ton, and iron manufactures up to 35%, earthenware, glass, and leather manufactures from 15°/^ to 30°/^. Books, paper and sta- tionery, and such household articles as candles, coal, salt, and soap, were also placed under duty. Nearly every subsequent year has seen alterations, mostly increases or inclusion of fresh articles, in the tariff. In 1884 between 600 and 700 articles were enumerated, while in 1885 nearly 100 were added. The American method of combining specific and ad valorem duties on the same commodity is followed — e.g. carpets paid 5^. per yard and coarser woollen yarns 3f^. per lb., in addition to 20%, ad valorem. Osten- sibly directed against the United States, these duties really affected English trade to a greater extent. Dutiable goods from Great Britain decreased in amount, while those from the United States increased over 20°/^ ; in respect to duty- free commodities the change was in the opposite direction. Though the Liberal party, which has always been favourable to free-trade, triumphed at the election of 1896, it has not attempted any general reversal of the pro- tectionist policy of its predecessors. Owing, however, to the growth of Imperialist sentiment, both at home and in the mother country, it succeeded in introducing the method of a preferential tariff for British goods, under which duties will be 25°/^ lower than those imposed on foreign products. It is possible that a like concession might be arranged with the Australasian colonies, and even with the United States, if equivalent concession were granted to Canada. COLONIAL AND OTHER TARIFFS. in The Australasian colonies were not affected by the prox- imity of a powerful state, and were therefore able to develop their customs arrangements independently. The first object to be attained was the receipt of sufficient revenue, but very soon a protectionist sentiment arose. Its influence was first seen in lower duties on colonial spirits and tobacco, by which the home producers of those commodities were favoured. As the colonies increased in population, more decided steps towards protection were made. Various rude manufactures, likely to be carried on even in a new country, were subjected to import duties, or a general rate of so much per cent, was imposed on all imports as a means of getting revenue, but necessarily with the practical effect of protection in such cases as those mentioned. It is impossible and unnecessary to follow the many changes of the short-lived administrations of the several colonies, but some of the general features are sufficiently simple and instructive for notice. In i860 there was an almost complete absence of duties on imports; beer, spirits, and sugar being the principal exceptions to this rule in New South Wales. The Victorian tariff was quite as simple ; so were those of South Australia and Queensland. Western Australia had a general rate of 77o on all imports. Tasmania and New Zealand had more complicated duties, but still very low ones. By 1870 higher duties were established. Victoria, which during the first years of its existence as a self-governing colony prided itself on its free-trade policy, had changed its system (1865), and was levying duties of 10% on imports. New South Wales had selected the milder rate of 5%, so had South Australia, and Queensland had advanced to 7j°/o, while Western Australia retained its former 7% rate. An attempt 112 COMMERCE OF NATIONS. to secure uniformity of tariffs in the colonies in 1863, on the basis of the then existing Victorian one, failed ; so that the growth of the rates was independent, though of course the example of the leading colonies had much influence on the others. Five years later New South Wales had abandoned its general ad valorem duties, but it charged sheet-iron £^2 per ton, cheese 2^., and herrings \d. per lb. Victoria in most cases retained its 10% duties, but in some instances — e.g. yarns — had a specific rate instead ; Southern and Western Australia had advanced to 10% duties; while Queensland had lowered hers to 5%. The tariffs of 1880 show on the whole an increase over those of 1875. Spun-yarns and bagging were now subject to specific duties in New South Whales. The Victorian duty on yarns was increased i5o7o (from 4i'. 6^. to ii5. 3^.); the 10% rates had become 20%. Western Australia had put 25% on to its general rate, which was i2j%. South Australia had made its duties specific; Queensland still retained 5% as the general rate; the New Zealand tariff had risen to 15% as the usual standard, with some 25% duties and specific charges on spirits and wines. Victoria has made several later increases in its duties, and Queensland in 1886 raised its scale to 7^%, and later that on yarns and clothes to 15%. The Tasmanian range of duties is from 12^% to 20%. New Zealand has now 20% as its most common rate, with several duties of 25%. It thus is evident that, with the exception of New South Wales, the colonies of Australasia are all moving towards more rigorous protection, or at all events higher duties advocated on what are admittedly protectionist principles. The only other self-governing colony, the Cape, has also COLONIAL AND OTHER TARIFFS. iij raised its duties. The year 1872 was the date at which responsible government was introduced. The previous duties of 7j% were raised first to 10%, then in 1884 to iij%; for many articles a further increase to 15% was made, but speedily reduced to 12%, with some articles at only 10%. The greatest English dependency, India, follows the commercial policy of the ruling state. Since 1882, when the import duties on cotton goods were removed, there has been pure free-trade in practice. The result is to be traced in the growth of Indian trade. Between 1875 ^^^ 1^9^ the im- ports have risen from ;^44,363,i6o to ;£89,3oo,399, and the exports from ;^57j984j549 to ;^io8,92i,849 — ix, speaking broadly, the imports have doubled and the exports increased over 85% in the course of fifteen years. The tariff systems of the Crown colonies are more intricate than that of India. Ad valorem duties are levied in Ceylon and most of the West Indian Islands, but they are in practice revenue duties, since there are no manufactures to be protected. Duties of 4% as in Trinidad, 6J% as in Ceylon, or even 12^% in Jamaica, are not serious hindrances to commerce. The duties on food- products, though they press heavily on the poorer labourers, do not effect much diversion of trade. Another feature of colonial tariffs is the employment of export duties. The tendency of protectionist doctrines is against the employment of this form of impost, as it checks the growth of exports ; it is therefore chiefly in the Crown colonies that we find duties on exported rice, sugar, rum, and coffee ; they are regarded as being really a charge on the land that produces the taxed articles, but at the same time they must hinder commerce, though their low amount prevents the effect being serious. The tariffs of the self- governing colonies are, it appears from the facts that we I 114 COMMERCE OF NATIONS. have stated, increasing in amount and in complication since twenty-five years ago. The simple statement, " no duties on imports," or "so much per cent," described with sufficient accuracy the position of most of the colonies. Now an index is required for each of the larger colonies ; that to the Canadian tariff of 1888 fills 250 octavo pages, and includes 863 articles, ranging from " absinthe '^ to " white zinc." Even this does not sufficiently show the difficulty of interpretation. The grades of commodities are not the same in all cases, and the rate of duty often depends on the use to which the article is to be put, which makes it necessary to inquire into the intention of the parties import- ing. The frequent changes in the rates and classification are a further trouble. Commodities are placed on the free- list or brought under duty according as the producers' or consumers' interest is at the moment the strongest. All these evils are the direct and unavoidable consequence of the development of a policy of protection, and they must be taken into account in weighing its advantages and disadvantages. Still, when fairly considered, colonial tariffs do not offer the same obstacle to trade as continental ones. In new countries the principal industries are those engaged in turning out food and raw materials, and these primary employments possess such natural advantages that manu- facturers can hardly hope for much success in the competition with them. Corn, meat, timber, wool, cotton, and minerals must be the chief exports, and they must be paid for in the more finished products of older countries. Protective duties may hamper but cannot destroy this natural circle of ex- change, and will generally tend to lower the gains that the territory employing them will obtain from its foreign trade. COLONIAL AND OTHER TARIFFS. 115 They may not be, and are not, an economical mode of raising revenue, but where the community is as prosperous as a tolerably well-governed colony generally is, the loss by waste of this kind is not much felt. In any case, the effect is rather seen in a check to the purchasing power of the colonial populations rather than in any stimulus to in- dustries that would rival the staple products of the United ELingdom. Discussions of commercial policy and history too fre- quently ignore the Spanish-American countries. A very large body of trade is carried on by Great Britain with South America and Mexico. The figures for 1889 show that British exports to those countries were, in round numbers, ;^29,4oo,ooo ; the imports thence, though much less, reached the respectable sum of ;^i 4,3 50,000, giving a total of ;^43,75o,ooo. Nevertheless, the tariffs of most American states are far more severe than those of the British colonies. Mexico is declared by Mr. Wells to possess the highest rates of duties in the world, over 100% being a common duty for the protection of the feeble native manufactures. Till very lately each province had its additional customs, and the Custom House regulations and formalities were another considerable check to trade. Brazil has followed the same policy. Ad valorem duties of 40% have been raised to 60% and 65%. Forty-eight per cent, is a comparatively low rate. There are besides numerous high specific duties. The Argentine Republic, Peru, Uruguay, and Venezuela follow the system of the United States '' Walker tariff'' of 1846 (p. 73), and group commodities in large categories or schedules, the articles enumerated in each paying a uniform duty. Forty-five per cent, is the highest for imported ii6 COMMERCE OF NATIONS. manufactures in the first-mentioned country, and 25% is the rate for otherwise unenumerated goods. Uruguay puts 47% on ready-made clothing, 31% on cotton tissues, and 20% on iron. Peru has 40% on all textile fabrics, and 45% on ready-made clothing. The Venezuelan duties are specific, and vary from \d, to i6y. per kilogramme. Colombia imposes a specific duty on each separate article mentioned, while Chili has for the most part ad valorem duties ranging from 15% to 35%. These scales of duty are much higher than the rates prevalent in Australasia, and yet they do not seem to check imports, at least from Great Britain. A partial explanation of this fact is found in the absence of productive manufacturing industries and in the lower cost of carriage to the ports. If the duty on goods to Buenos Ayres is higher than on those to Melbourne the freight is less, and the home supply is less capable of meeting demands. Moreover, the rigorous fiscal system is in keeping with the defective monetary and commercial organization of the countries, so that the trader is prepared to encounter high duties as well as depreciated currency and inefficient police and justice. The tariffs are not, it may be remarked, based on any consistent protectionist theory ; they are rather the outcome of the need of revenue and ignorance as to the best mode of obtaining it. CHAPTER XI. THE MODERN PROTECTIONIST THEORY. One lesson that the study of commercial policy from the historical point of view teaches with the utmost plainness is the dependence of the particular trade regulations adopted by any community rather on the existing social conditions and the interests of the strongest classes, than on any precise theoretical doctrines. It is not by reason of special enlightenment that Manchester and Bordeaux have favoured free-trade, nor is it pure want of intelligence that has made Philadelphia and Melbourne strongholds of pro- tection. The great exporting industries everywhere naturally and reasonably desire an extension of their market, while districts that possess special advantages over their country- men, though not over foreigners, in certain forms of pro- duction as naturally though not so reasonably strive to retain the benefits of this superiority. But though it would be a grave error to regard trade policy as the direct product of theory, there is an inevitable connexion between them. A restrictive commercial system is certain to have a theory of protection as its counterpart, and a free-trade policy will be accompanied by an appropriate doctrine. The function of science is, no doubt, confined to ii8 COMMERCE OF NATIONS. determining the truth or falsehood of propositions; an absurdity does not cease to be such, merely because powerful classes or even whole nations accept it as true. The social sciences are in this respect somewhat exceptionally placed. Dealing as they do with problems in which senti- ments and beliefs are often the most powerful factor, they must take account of mistaken views and prejudices, since these errors actually affect the object of study. Thus pro- tection, be it ever justifiable or not, is an existing fact; and has the same claim to full and careful examination as any other fact — say inconvertible paper currency or usury laws — both of which have often been the product of erroneous beliefs as to the means of promoting social welfare. Economists have, it must be confessed, been a little back- ward in this part of their work. Of hostile criticism and exposure of fallacies there has been enough, if not more than enough. Exposition of the protectionist standpoint and elucidation of its basis, though at present more needed, are not so easily obtainable. To understand the position taken up by the modern opponents of free-trade, it is above all essential to recognize that the key-note of their system is nationality. The advocates of protection with wearisome repetition set up their plan as national, and contrast it with what they deem to be the cosmopolitanism of Adam Smith and his disciples. The claims of the nation as a whole are accentuated, and regarded as far more important than those of the individual or the world at large. How perfectly this attitude harmonizes with the actual policy of European, and indeed of all protec- tionist states, is apparent. A particular industry is suffering under the pressure of foreign competition — /. e. a national interest is affected. The state then steps in to protect it . THE MODERN PROTECTIONIST THEORY. 119 against the danger by imposing additional duties on the foreign product, the loss to individual consumers and to the world as a whole being disregarded as unimportant. Thus regarded, the policy would appear to be nothing but \ the old mercantile and pre-mercantile methods continued in modern times under a new name. Without denying the portion of truth contained in this statement, we would prefer to dwell on the noteworthy differences in general statement and in special arguments between the older and the now prevalent systems. Those differences may be said to be the outcome of economic discussion and criticism. Up to the middle of the eighteenth century no serious question had arisen respecting the regulation of industry and commerce by the state. Particular measures might be opposed on the ground of expediency, but the broad argument against restraints on commercial activity was entirely unknown. The situation is now completely changed ; for the last hundred years the advocate of protection has had to state his case with constant reference and attention to the free-trade argu- ment. One consequence has been that an unduly large part of protectionist works is occupied by attacks on certain views of Adam Smith or of his successors. Either particular parts of the economic theory of foreign trade are employed, or the plea of exceptional circumstances is put forward as invali- dating the general conclusion in favour of liberty. The usual appeals to " practice '^ against " theory " are due to the same cause. A feeling that economic science furnishes on the whole a basis for free-trade is widely prevalent amongst protectionists, who prefer to abandon the science rather than accept what they think is its legitimate result. The restrictive system, as we might expect, has a distinctive colour, according to the country in which it is expounded. I20 COMMERCE OF NATIONS. It would be strange if a policy claiming to be specially suited for a particular nation did not bear some mark of that nation's peculiarities. American protectionism is not quite the same as that professed in Germany, and the latter again differs from the position of French or Italian protectionists. There is, however, a general similarity that is far more important than any special divergences, and bears witness to the fundamental unity of the forces that have produced the restrictive policy and belief. Local conditions lead to the elaboration of particular lines of argument, and to emphasis on special points, but the case for protection admits of being reduced to general forms, which are reproduced under the most apparently diverse circumstances. The earliest advocacy of protection, as distinct from the mercantile doctrine, is probably contained in the Report on Manufactures (1791) of the great American statesman, Alexander Hamilton, which, we are told by so hostile a critic as Professor Sumner, '*is the best statement of the protectionist argument ever made.'' Most of the pleas used by Hamilton have been the strong points of the later protectionist schools. One ground urged by him in favour of protection was its adoption by other nations. " If the system of perfect liberty to industry and commerce were the prevailing system of nations, the arguments which dis- suade a country in the predicament of the United States from the zealous pursuit of manufactures would doubtless have great force .... but the system which has been mentioned is far from characterizing the general policy of nations. In such a position of things the United States cannot exchange with Europe on equal terms." There is here a distinct statement of the reciprocity or " fair-trade " view, which regards freedom of trade as only serviceable THE MODERN PROTECTIONIST THEORY. 121 when it is granted by both the trading countries. As this is a very precarious basis for a policy of protection, since it ceases in respect to commerce with free-trade countries, Hamilton proceeds to develop other reasons for the system of restriction. To those who maintained that manufactures would arise under the normal action of individual interest, he answers that the initial efforts in this direction will be hindered by " the fear of want of success in untried enter- prises'^ |:he intrinsic difficulties of first essays, and the .... artificial encouragements with which foreign nations second the exertions of their own citizens ; '' thus anticipating the " infant industry " argument familiar to readers of J. S. Mill's Political Economy^ and believed by most of them to have originated with him. The advantages which the establish- ment of manufactures would bestow are next exhibited. They are — First, the diversification of industry, allowing of greater division of labour, and " affording greater scope for the diversity of talents.'' This plea, which made for manu- factures in a new country like the United States at that time, would equally apply to agriculture in an old nation such as England. A second argument is discovered in the statement that additional employment will be given to those \ not at present in the business, a contention that has even now more popularity than any other of the protectionist pleas. Third comes the effect of protection in encouraging immi- gration, by securing new and profitable forms of employment, a point of considerable theoretical and practical interest. Fourthly, the benefit of a more certain and steady market is ascribed to the protective system, which thereby saves the cost involved in the transport of goods. Since Hamilton's time the advantage of reserving the home market to native pro- ducers has been repeated on innumerable occasions by the 122 COMMERCE OF NATIONS. upholders of the system he favoured. Lastly, he argues that protection, instead of raising, actually lowers prices by the home competition that it calls into being, and is thus free from the charge so often brought against it of creating monopolies. From this very careful statement of the case for protection, Hamilton passes on to consider the mechanism to be em- ployed in a manner that shows most clearly the connexion of his views with the mercantile system. The various expedients that we have seen in action in the seventeenth and eighteenth centuries (chap, iv.) are enumerated, and their relative efficacy considered. Duties on imports, bounties, premiums, drawbacks, prohibition of exports useful for industry, all figure in the list, but are tested with refer- ence to their effect on industry rather than on the influx of money. Since Hamilton was, as Mr. Bourne has shown, acquainted with the writings of Adam Smith, there can be no question as to his position being the outcome of the attacks on the mercantile theory contained in the fourth book of the Wealth of Nations, The Report on Manufactures is thus a restatement of what its writer regards as the essential truths of the restrictive system, separated from the errors that had furnished a plausible ground of assault on it. The importance of Hamilton's views does not rest simply on the effect that they produced on American policy, nor on the deservedly great reputation of their author. They have with good reason been regarded as the source from which the two most prominent advocates of protection in the present century — each of whom has succeeded in creating a following — derived their inspiration. List and Carey, have each added to and expanded particular parts of the protectionist argument, but the basis of their pleas is to be found in Hamilton's Report. THE MODERN PROTECTIONIST THEORY. 123 The career of the former — List — was essentially that of an " agitator/' In his restless activity and unhappy end he re- calls Lassalle, the socialist apostle ; in his persistent advocacy of a particular line of commercial and national policy, he suggests the greater and more honourable name of Cobden. Born in Suabia in 1789, he entered at an early age into the civil service of his native state ; he soon, however, came in contact with the authorities, and after a short imprison- ment went to the United States, where he published (in 1828) a plea for protection, under the title of A New System of Political Economy, Returning to Germany in 1832, he became a leader of the protectionist party, and prepared his National System of Political Economy that has so profoundly influenced German commercial policy. He died by his own hand in 1846. The system advocated by List contains the leading ideas that have influenced continental, American, and colonial statesmen in adopting the tariff systems whose history we have traced (chaps, vii., viii., x.). Starting with the con- ception that society passes through a series of stages, each of which is an advance on the preceding ones, List holds that the state or governing power can facilitate the pro- cess of transition. Omitting the earlier stages of hunting and pastoral life, there are the two distinct conditions of a (i) agriculture pure and simple, and (2) of agriculture, ^w manufactures, and commerce combined. It is, or should f be, the aim of the statesman to bring his country as soon as possible into the second. Some countries are so backward that this development is at present hopeless for them ; others have already reached it. For either of these the protective system is not desirable. Free-trade, on the contrary, is the best policy, as by it the undeveloped countries obtain 124 COMMERCE OF NATIONS. manufactures that they cannot produce themselves, while manufacturing nations gain a wider market for their products. There is, however, a third group of nations with prosperous agriculture, and ripe for the manufacturing stage. To over- come the difficulties of the transition, protective duties are needed. List believed that the two nations in which he was more particularly interested — Germany and the United States — were in this situation. England, on the other hand, was beyond the need of such expedients, and in her case the maintenance of protection was, he thought, a mistake due to the stupidity of the Enghsh governing class. The "industrial protective system'' thus appears as an agency to be applied at a special period in a nation's growth ; it is at that stage indispensably necessary for the furtherance of national welfare. In corroboration of his opinion. List makes a persuasive appeal to history, as showing that manu- facturing industry has always needed protection as a pre- requisite for its successful development. Italy, the Nether- lands, Spain, France, Germany, Russia, and the United States are in turn brought forward to illustrate the pro- position that ** nations .... can without inconsistency, and should, change their system in proportion as they advance. At first, by free-trade with nations of higher culture, they emerge from barbarism and improve their agriculture ; then by means of restrictions they give an impulse to manufactures .... then finally, by a gradual return to the principle of free-trade .... they maintain the supremacy which they have acquired." The effect of this argument from past experience has been considerable, both in the United States and on the Continent. Besides the general statement and its supposed historical justification. List employs several theoretical arguments in THE MODERN PROTECTIONIST THEORY. 125 support of protection. The most remarkable is that based on the theory of '* productive powers." Adam Smith and his successors — "the School," as he calls them — confine their attention to actual values, or, in other words, to existing products ; they disregard the capacity to produce those values. Complete commercial freedom may give the greatest amount of value at a given time, but a wise restrictive policy will increase the production of wealth in the future; present loss will in this way be more than recompensed by subsequent gain. The use of protection is substantially a national apprenticeship, and should be judged in that light. " The School " — to adopt List's phrase — is guilty of other errors; it deliberately confounds individual with national interest. Unrestricted exchange is perhaps for the immediate advantage of the exchanging parties, but the transaction that benefits the individual Frenchman and German may not benefit, but rather injure France or Germany. The American purchaser of imported manu- factures, to take another instance, may profit, though the industrial interests of the United States suffer by the check to their development that the purchase of foreign goods causes. Again, Adam Smith and the economists have failed to recognize the full significance of their favourite doctrine of division of labour. They neglect the increased interchange that the encouragement of manufactures in a hitherto purely agricultural district brings into being. The creation of a " home market " saves the cost of transport, and the increased competition of the new industries lowers prices. These erroneous doctrines are, in List's opinion, the result partly of the cosmopolitanism which is the character- 126 COMMERCE OF NATIONS. istic alike of the Economistes^ of Adam Smith, and of his French and EngHsh disciples, partly of their materialistic view of economic life, and partly also of their undue individualism^ which paid no attention to the existence of nations, and limited unduly the functions of government. The main contrivance by which full industrial develop- ment is to be secured, is the application of protective import duties, varying in amount with circumstances and confined to manufactures, agricultural products and raw materials being altogether exempt. The other expedients are indeed noticed, but receive a very subordinate place. It is hardly necessary to remark that List's doctrines are a development of those of Hamilton, modified by the national tendency to abstract speculation. The encourage- ment of manufactures is the common aim \ the advantages to be realized and the mode of obtaining them are similarly conceived. The chief difference is the greater elaboration that List has bestowed on his work, and the use of history as affording confirmation of his assertions. All that is really suggestive and powerful in protectionist theory can be traced back to Hamilton and List, but before examining the doctrines in detail, some other expositions claim our notice. That of greatest practical weight is found in the writings of H. C. Carey, who for many years carried on a vigorous protectionist propaganda. Commencing his career as a free-trader, he declared himself to have been convinced of the wisdom of interference with exchange in order to shake off the commercial domination of England. " British free-trade " was in reality the continuance of the old colonial system. Their greater capital and cheap labour enabled the manufacturers of England to retain the supremacy that protection had originally given them. The THE MODERN PROTECTIONIST THEORY. 127 remedy, and the only way of reaching true free-trade, was by a vigorous use of protection until native industries were strong enough to meet their foreign competitors on equal terms. The importance of the home market, the advantage that agriculturists gain by the proximity of manufactures, and the necessity of a diversity of industry for a complete national life, are dwelt on by Carey, as previously by Hamilton and List. It cannot be said that there is anything very original in his views, which are wrapped up in a mass of declama- tion admirably adapted to stir up the national prejudices of his readers. But his influence in creating a so-called school of economists, and thus giving a quasi-scientific colour to the protectionist cause, is undeniable, and should receive due recognition. Like List, he was rather fitted for popular advocacy of doctrines that excited his feel- ings than for calm discussion of the economic problem of exchange in its efifects on the individual and on society. Germany and America have been the centres where the theory of protection has been most remarkably developed, and in those countries List and Carey are by far the most influential representatives of the policy. Their followers are indeed numerous. Each election campaign in the United States brings out an abundant crop of works establishing to the writers' satisfaction that protection is the mainstay of American industry. The same thing on a smaller scale was noticeable when the German tariff of 1879 (P- 9^) was under discussion. The subject in its commonplace aspects has been indeed, in vulgar phrase, *' threshed out," without the addition of much that could strengthen or elucidate the position which we have been 128 COMMERCE OF NATIONS. considering. Some special arguments have, however, been added which are in complete accordance with the general view that we have taken of the growth of protectionist theory. Just as Hamilton, List, and Carey are, consciously or unconsciously, seeking to repair the breaches in the mercantile system by what they deem more durable material, so are the protectionist theories of Cournot, Bowen, and others adjusted to meet the theory of international trade as taught by Ricardo and J. S. Mill. The doctrine that exchange always gives a surplus of advantage to be divided in some proportion between the exchangers is so fatal to protection, that its champions are compelled to endeavour to weaken its force, a process usually attempted by summoning up some supposed case in which this result is not reached. These arguments at their best are not so much a defence of protection as a system^ as pleas for exceptional treatment under peculiar conditions, for which reason we may reserve their consider- ation for a more suitable place. Quite different is the situation of some later phases of the protectionist movement that have hardly as yet developed an adequate theory, but which illustrate the influence of actual policy upon economic doctrines, as also the tendency to increased rigour of applica- tion that a protective system engenders. The causes already described (chap, ix.) that have led to the con- tinental reaction against the liberal policy of i860 — 1870, have produced what has not inaptly been called the "system of solid protection." Agriculture and manufactures have both been affected by far-reaching economic changes, and the pressure of pubHc opinion has forced legislators to erect barriers at once against American corn and meat, and THE MODERN PROTECTIONIST THEORY. 129 against British manufactures. This system, in its essence less reasonable than the system of protection to manu- factures simply, is nevertheless far more popular in Europe. The agricultural interest is as determined to secure the aid of duties as the manufacturing one. Whether this policy will survive the temporary conditions that have brought it into being is doubtful, though the difficulty with which the English and French protective systems were reformed in the present century suggests the belief that it will. Very different circumstances have had a curiously similar effect in the United States. The increases of duties and the criticisms to which they have been subjected are the reasons for the bolder position taken up by the extreme protectionist party, who regard foreign trade as an evil wherever it competes with home production. The pro- tective tariff, with its latest exaggerations, is defended on the ground that American civilization is distinct and separate from that of the world. Its higher standard of comfort can, it is said, be preserved only by complete exclusion of any foreign products that can compete with native labour. This policy of raising a " Chinese wall '* around the territory of the United States has received far more support than would at first sight appear possible, and its application undoubtedly involves the employment of protection with respect to all forms of industry. Colonial protectionist doctrines do not need any special discussion. So far as they are not confined to appeals to experience and the comparative statistics of free-trading and protectionist communities, they do not get beyond a repetition of the arguments already noticed. The need of encouragement to new industries, the advantages of manu- factures to the agriculturists themselves, and the special K I30 COMMERCE OF NATIONS. value of the " home market," are the pleas in Australasia and Canada, as in the United States. The history of the protectionist theories of the present century helps to explain their nature and real origin. In all countries we see that the main idea of their upholders is to secure national development. Wherever we turn — the United States, Germany, Russia, or the colonies — it is the same. To create new industries, to place those struggling into existence on a firmer basis, to secure employment for labour, and to increase population and wealth, such are, in every case, the objects aimed at. Opinions may differ as to the particular objects of encouragement — the followers of List are as much opposed to duties on food and raw materials as the absolute free-trader — but the end to be realized and the general agency to be employed are conceived in the same way. Another common characteristic of the theories under consideration is their rejection of the doctrines popularly known in England as "political economy." In their cruder forms they reject altogether the use of general principles, and prefer to rely on the practical wisdom of men; in their more refined developments they take advantage of the many difficulties and complications that such a subject as foreign trade undoubtedly presents. The free-trade argu- ment stated by Adam Smith is essentially an appeal to the broad and general advantages of liberty admirably adapted to the spirit of the eighteenth century. Still further popular- ized, as e. g, by Bastiat and the free-traders of England and America, it failed to comprehend and explain the more difi&cult parts of the question. The effects of duties on imports are too varied and complicated to be fully explained in a primer or catechism, and the attempt to accomplish this THE MODERN PROTECTIONIST THEORY. 131 impossible feat supplied the acuter protectionists with a formidable weapon. Cases in which producers suffered from import duties ; examples of industries developed by the aid of protective duties ; conflicts between individual and general interests ; complicated reactions in the dis- tribution of wealth, owing to the effect on the qualities of land in cultivation or the particular situation of labour and capital, were easily discovered, and brought forward as refutations of the free-trade doctrine. Questions that required for their correct solution a knowledge of general economic principles and a capacity for following the course of abstract reasoning, had to be dealt with off-hand and by means of popular discussion. It is not therefore surprising that the effect of such controversies on the ordinary citizen was either to produce a disbelief in the too absolute and unguarded assertions of the free-traders, or at best a feeling that " much might be said on both sides," with the inevitable result of giving full play to the sentiments that in so many societies favour protection. The theory of restriction has a further advantage ; as presented by its ablest advocates, it is essentially political. Economic doctrines are presented with a temporary isolation and separation of the special element with which they deal, and thereby have gained much in precision and definiteness. But this sciendfic gain makes them less fitted for immediate application to actual facts. To show that a certain measure promotes or retards the growth of wealth, does not prove it to be beneficial or the reverse ; the other conditions in the problem must be taken into account. The economic analysis is but a single part of the process. Protectionist writings neglect such limitations ; all the considerations that can affect the question are taken into account together ; and 132 COMMERCE OF NATIONS. though there is an unquestionable loss of accuracy, the effect produced on the reader is probably greater. Broad issues of social progress have far more attractiveness and vital interest than discussions on " the incidence of taxation '' or " the dis- tribution of the precious metals." An erroneous or defective economic theory is often accepted as giving a support to useful social doctrines. As Mill remarked half a century ago, " Protectionists often reason extremely ill, but it is an injustice to them to suppose that their protectionist creed rests on nothing superior to an economic blunder ; many of them have been led to it much more by consideration for the higher interests of humanity than by purely economic reasons." The combination of social and economic argu- ments has given strength to the protectionist belief; and in order to form a correct judgment, the whole system should be studied, not merely its economic side. But though the case for restriction does not place its sole dependence on economic reasoning, it is by the nature of the subject compelled to give a good deal of attention to the effects of commercial policy on the production and distribu- tion of wealth. Economic considerations come necessarily to the front, and it is therefore desirable to examine the conten- tions in favour of restriction primarily from the economic point of view, taking in the social and political results so far as they qualify or limit the results that economic considera- tions alone would lead to. CHAPTER XII. ECONOMIC ARGUMENTS FOR PROTECTION. In arranging the various pleas urged in favour of the protective system, it is desirable to take those that have had serious influence on policy and that possess real importance, before noticing contentions that rest on some exploded fallacy or appeal to vulgar prejudices. A system may fairly claim to be judged by its strongest positions. Taking this rule as our guide, we proceed to examine the more im- portant of the arguments, some of which we have already noticed in considering the general features of Protectionism. I. Protection aids Young Industries. — By far the most effective of the arguments used by the protectionists, as distinct from those surviving from the days before Adam Smith, is that which asserts that new industries stand in need of protection from foreign competition. We have seen (p. 121) how it was employed by Hamilton, and in a wider sense by List. For a long period it was the standing plea of American protectionists ; it has, moreover, received the qualified approval of J. B. Say and Mill, and is repeated in numerous German text-books of economics. Stated shortly, the argument is — The commencement of an in- 134 COMMERCE OF NATIONS. dustry is beset with difficulties which reach their maximum when the attempt has to be made in a country hitherto entirely destitute of anything resembling the particular form of production. The co-ordination of the various agents of production into an " establishment '^ or " factory " is a process requiring time, and not likely at first to be remuner- ative. Besides, in an occupation not previously known, the supply of labour suited for the industry is at first wanting. The enterprising manufacturer has to contend against this and similar obstacles ; on the other hand, there is no assured market for the product. The weight of reputation and the advantages that organization and a ready supply of the requisite forms of labour and capital give are on the side of the older producers. But if these initial hindrances could be overcome, it may be that the particular industry would yield its cultivators a satisfactory return. When a sufficient supply of labour is obtainable, and the due amount of organization and ** connexion " formed, the occupation may prove to be a valuable part of the national industries. Such being admittedly the truth, it is very natural to suggest that a protective duty imposed on the product of the industry will give sufficient inducement to native producers to encounter the obstacles in their way, and to establish under cover of this ** protection " what will within a limited time become a healthy and self-reliant industry. Here, it may be said, is a case that cannot be set aside by the use of ''^doctrinaire common-places,*' and which requires sober and careful consideration. The first point to be noted is the limitation of the contention. It cannot, as some of the more extreme American protectionists have argued, apply to new industries at any stage of national development, since then these " infants " would need encour- ECONOMIC ARGUMENTS FOR PROTECTION. 135 agement in the home market. The introducer of new processes must perforce take the chance of loss on himself, otherwise there would be no check on rash and improvident enterprises. To plead for "protection" to new industries in England or the United States involves asking for state aid for all feasible projects. Again, all new industries in a new country do not need protection, since many have been introduced successfully without it ; when an enumeration of the successes of encouraged industries is made, it is well to remember the unaided ones that have flourished. The distribution of industries within each of the larger countries of the world is a striking witness to the potency of this " natural " extension of business to new areas. It is only so far as there is some special obstacle presented by inter- national boundaries that the agency of protection can be called into operation. Within these comparatively narrow limits the use of protective duties depends on the facts of the particular case. The onus of proof rests with those who advocate their employment, and they are bound to show (i) that the industry to be favoured will after a time be self-supporting, and (2) that the ultimate advantage will exceed the losses incurred during the process. A careful computation of the diiferent elements involved — the loss in each year of protection, with interest on the losses during earlier years, the estimated amount of gain to accrue when the time for independence is reached — will, it appears, tend to the belief that protection as an agent for establishing new and profitable industries is not likely to prove satisfactory. When it is added that the complex and elaborate estimates, which are necessary for a right decision, will have to be made by a legislative body liable to be affected by the influence of interested producers, and at best imperfectly 13^ COMMERCE OF NATIONS. equipped for the task, the risk of trying to encourage by means of protection ought to be sufficiently clear. Passing from these general considerations to the results of experience, it is interesting to inquire into the actual em- ployment of protection in this respect. The early industrial history of the United States discloses the remarkable fact that the early development of the cotton, woollen, and iron industries was accomplished with little assistance from duties. Professor Taussig attributes some efficacy to the tariff of 1816 so far as cotton is concerned, but with this exception, the service rendered by duties was inappreciable, unless the enforced prohibition of trade in the period 1808 — 1 81 5 (see chap, vii.) be regarded as such. The cases of , Victoria and New South Wales — the former protectionist, the latter free-trading — are also suggestive. Without entering on the controverted parts of the comparisons made between these colonies, it may be said that without protection New South Wales has certain manufactures ; while Victoria with it does not much exceed her neighbour in manufacturing development. "Victoria," says Sir C. Dilke, ** makes no linen, weaves no silk, spins no cotton, and manufactures but a small portion of her woollen fabrics ; " though, as we saw in chapter x., she has had protection for twenty-five years for her "infant" industries. Moreover, the establishment of an industry under cover of a protective duty does not prove that it is an economic benefit. So long as the duty is continued, there is primci facie evidence that it is a loss, and even after it is withdrawn there is much difficulty in deciding whether the gains or losses preponderate; and if the former do, whether they could not have been obtained on easier terms under freedom. The great complication of the problem, and the natural ECONOMIC ARGUMENTS FOR PROTECTION. 137 tendency to favour native industries, make it desirable to insist on applying the most rigorous tests to any particular case. On the whole, the conclusion suggested is that the case of protection to young industries is more a conceivable than practical example of the wisdom of a protective policy. It is akin to those difficult cases that perplex moralists, and belongs rather to the domain of economic casuistry than to subjects fitted for the deliberations of statesmen. What is by its very nature exceptional cannot form the foundation of a general policy. II. Protection increases Productive Power. — The plea that a new industry may stand in need of support against foreign competitors has been expanded into the wider doctrine that protection to industry, while it inflicts a present loss, yet tends to improve the power of the country in which it is applied, and to more than recoup the early losses by the later increase in production. Considered from this point of view, the industrial protective system resembles an investment of capital on the part of the com- munity. Just as it may be in the long run profitable to construct railways that at first scarcely pay their working- expenses, or to expend large sums on a system of national education, so, it is argued, there may be ample justification for applying a wide-reaching policy of protection that will bring the nation more rapidly through its several stages of progress, and create the immaterial capital of industrial capacity. The analogy of the individual who expends time and money in learning an art or profession is suggested. National protection is paralleled by the case of the clerk who sacrifices his present earnings to prepare himself for — say, the medical profession. To deal with this argument fairly, we must concede the 138 COMMERCE OF NATIONS. possibility of a backward people being improved by the wise direction of a benevolent despotism. A careful and perfectly-organized system of protection might accomplish useful results. The free-trade case, however, rests on the broad and well-established fact that the guidance of indi- vidual self-interest is, in purely industrial matters, much safer than the direction of even the best-informed Govern- ment. The amount of the national industries will in every country depend on the quantities of labour, capital, and natural agents at the disposal of producers. The effective- ness of production will depend on the distribution of the available forces, and that distribution, depending on so many complicated and disguised conditions, cannot be sufficiently arranged by any state agency. All attainable evidence goes to show that where the ordinary conditions of social life are maintained, the care and interest of those concerned in the work of production are by far the best guarantees, for a beneficial employment of the productive resources available. That part of the argument which claims that the power of production is increased by protection — so far as it is distinct from the case of infant industries previously considered — rests on the inadmissible assumption that the interest of the producers will not lead them to take up those industries in which productive power will increase most rapidly. The acquisition of industrial skill is quite as likely to advance under free-trade as under protection, though the lines which it takes will probably differ. III. Protection is advantageous, as it promotes Diversity of Employment. — The argument just examined passes very easily into the one now to be considered. From the position that productive power is increased by protection, it is not far to that which maintains that social and even ECONOMIC ARGUMENTS FOR PROTECTION. 139 economic advantage results from the possession of a variety of industries. American and Australian protectionists have laid peculiar stress on this part of their case. They show the effects that a town has on the surrounding country; how it affords a profitable market for agriculturists within its reach, and adds to the value of land. The many ways in which it stimulates intellectual life and promotes culture and civilization are not left unnoticed, from all which it seems to follow that the indefinite and disputable loss that protection inflicts on consumers of imported goods is a small price to pay for such benefits. With a system of pure free-trade, new countries would be confined to agriculture and the producing of raw materials, the civilized life that attends manufactures being confined to the older and more settled countries. To this very effective plea it may be answered that if protection be the price paid for the development of industries and the growth of society, it is not too much for the benefit received ; but there is no proof that such a price is demanded, or that the sacrifice is calculated to secure the desired aim. Whatever may have been the case in earlier periods, there is now no obstacle to the formation of towns and the prosecution of varied industries in new countries. On this, as on other parts of the subject, the conditions of domestic trade throw a good deal of light. The perfect free-trade within Great Britain has not prevented the establishment of industries in districts formerly agricultural. American experience is to the same effect. A rude western state is not prevented from gradually developing fresh industries by the absence of protection against its older fellows. The tendency to variation is sufficiently strong to lead to the introduction of suitable forms of manufacture at I40 COMMERCE OF NATIONS. the earliest moment. The history of industry and commerce is here altogether on the free-trade side. From the economic point of view it may also be urged that mere variety of industry is not of itself desirable. The process of division of labour implies, as its correlative, in- creasing specialization, which must include the concentration of industries in favourable situations. Thus the cotton industry of Lancashire is preferable to, say, a dozen small and unprosperous industries employing the same number of persons and using an equal amount of capital. The number of industries is of itself no criterion of industrial develop- ment, though it is probable that great variety in employment will not be reached in a rude society. The social side of the argument is, however, more important, and however we may question the wisdom of the particular agency of protection, we cannot avoid recognizing the good intentions of many of those who advocate its use for this object. Though the plea under consideration has been usually made in the interest of manufactures, it can, as we have found (p. i2i), be also sometimes used in favour of agriculture. The recent agricultural depression in the United Kingdom has familarized us with the cry that the farmer should not be sacrificed to the manufacturer. The growth of the urban as compared with the rural population and the contraction of tillage have suggested fears of the destruction of agricul- ture, for which protection is, at least, a plausible remedy. To maintain a due proportion between the two great forms of industrial effort, appears to be a problem eminently deserving the attention of the statesman. Here, too, the test of ex- perience seems conclusive. An established industry, or, to speak more correctly, a whole group of industries, is not easily destroyed. More especially in cases where the law of diminish- ECONOMIC ARGUMENTS FOR PROTECTION. 141 ing returns applies, and where a reduced amount of produce can be obtained on cheaper terms, it is almost impossible to dislodge the more favourably-placed producers. A moderate contraction of the wheat area of England would leave no land under that crop that could not compete with the best foreign soil; unless, indeed, it should be required for more pro- fitable crops, when there would be merely a change in the form of cultivation, but on the whole no diminution. In fact, the j^ld rule of letting things right themselves is after all the best. IV. Protection encourages Immigration of Labour and Capital. — Among the arguments that have attracted the more thoughtful supporters of protection this holds a high place. Cournot and Carey have both dwelt on it, and moderate free- traders have conceded the difficulty of dealing with some aspects of the case. The effect of a rigorous pVotective duty is to shut out the foreign producers of the protected article, who, if they desire to retain their hold of the market, may transfer at least a portion of the industry to the pro- tecting country. Many possible examples of the process have been suggested, from the Swiss watchmakers brought to France down to the tin-plate workers, whose industry has been affected by American tariffs. A direct increase of labour and capital is gained by the protecting country, and the result is characterized as " the greatest triumph of the protective system " (Roscher). This " victory " is perhaps more apparent than real. To appreciate exactly the effects of protection in this respect, a distinction must be made between the case of a particular industry and industry in general. Where a country is the principal consumer of a commodity — as the United States are, notably, of tin-plates — it is evident that protection, if sufficiently high, will lead to transfer or to the partial abandonment of the industry in other 142 COMMERCE OF NATIONS. countries. The displaced labour and capital may either change its locahty or its occupation, and unless the difficulty of the latter is specially great, this will be the more likely course. / For the non-existence of the industry in the protected country { proves that the conditions are unfavourable for it ; otherwise V^me beginning of it would have been made. Further, since imports must (other things being equal) balance exports, a part of the protecting country's industry will suffer, unless the transfer takes place at once. The wider effect on the general course of industry is more important. Protection so far raises the cost of living, and thereby reduces both profits and wages ; but as high wages and profits are the chief cause of the influx of labour and capital, protection in this way tends to check immigration. In a new country, where interest and wages are both high, this retarding influence may be concealed ; but it appears that the great mass of American immigrants are not drawn by protection, since they are not employed in protected industries. The differ- ence between American and English wages is much greater in the case of unskilled than of skilled labour. The often- quoted case of Victoria and New South Wales shows that the movement is from, not to, the protectionist colony. The result is therefore that, while a special industry may receive an increase of numbers through the agency of protection, it has a counter-tendency as regards the whole country by the increased cost of living that it causes. The normal flow of capital and labour to new countries in any case requires no artificial stimulus. The fear of depopulation or loss of industry through the action of foreign protective systems is, it may be said, wholly unfounded. Switzerland, which was particularly exposed to this risk, has not in fact suffered. ECONOMIC ARGUMENTS FOR PROTECTION. 143 V. Protection lowers Prices by increasing Home Com- petition. — One of the strongest of the free-trade arguments is based on the cost of protection to the consumer, A duty imposed on any commodity raises its price, and thus the expense of supporting the favoured industries is placed on the whole community. Protectionists have sought to escape this result by reference to the effect that increased home production will have on prices. *^ If," says List, ** protective duties enhance for a time the price of domestic manufactures, they secure afterwards lower prices by means of internal competition." If well founded, this would be a complete defence. Lower prices, other things being equal, imply a greater abundance of goods and a better return alike to labourers and capitalists. Un- fortunately there is no evidence for the statement that protection lowers prices. The natural course of pro- gress in manufactures tends to reduce their cost of pro- duction, and thus there is a downward movement in prices of manufactured goods in all countries, a movement checked, not assisted, by import duties. In the United States the gradual withdrawal of the inconvertible paper currency made the period after the war one of falling prices, a fact that gave apparent force to the argument under notice. A comparison with the scale of prices in other countries brings out the real cause of the change. Besides, the argument really would prove too much, as, if prices were lowered by protection, it would cease to be needed when its full effects were in operation. VI. Protection does not raise Prices to the Consumer. — Very closely connected with the preceding is the plea that the cost of protection is not borne by the consumer. Import duties, it is contended, have to be paid by the foreign pro- 144 COMMERCE OF NATIONS. diicer, and are in fact a toll levied on the privilege of access to the protected market. Profits abroad have to be curtailed, and the national revenue benefits. To fully discuss the truth of this assertion would require a reference to the very intricate question of the incidence of taxation, but for the particular point at issue it is not difficult to see that, granting the assertion, protection ceases to be effective. If, the duty notwithstanding, the foreign supply comes in, there is no stimulus to home producers. The sole way in which pro- tection can benefit the native producer, is by raising prices, and if it fails in that its object is unaccomplished. But the view taken of the incidence of these duties is quite incorrect. Taxes on imports can only fall on the producer in the rare case in which there is no second market for the commodity, and there is so little demand for it in the protecting country that the limitation of the supply will not raise the price. Such an instance is hardly a foundation for a general rule. VII. Protection secures a Steady Market. — One of the greatest evils of the modern industrial system is its insta- bility ; prices and wages move up and down in a way that often defies prediction. The price of wheat in England depends, amongst many other things, on the harvest prospects of France, India, Russia, and the United States. A temporary remission of the French import duty or the failure of certain winds in India will send up the price in a day. International commerce is more elaborate than the earlier national trade ; therefore any failures or misunder- standings affect the most remote market. A protective policy is sometimes advocated as providing a security against undue disturbance. It appears much easier to gauge the relations of supply and demand in a single country than in the world market that free-trade introduces, and ECONOMIC ARGUMENTS FOR PROIECTION. 145 therefore the protective system acts as a clieck on the extending division of labour that the normal conditions of commerce are ever tending to establish (p. 13). This method for preventing fluctuations, however, fails to accom- plish its object. Great as are the forces that cause variations in price, there are others that over a large area tend to prevent them. In a widely-supplied market the movements of price depend on a great number of circumstances, but their very number leads to frequent compensation of one by another. The effect of bad harvests in Russia or India may be balanced by a good one in the United States, so that the price of corn may remain steady during a period in which the sources of supply are very different. The very serious element of artificial variations, the result of combination, is less powerful in an open market. " Rings " and " corners " are more likely to flourish with the cover of protection. Both as limiting fluctuations in prices, and as tending to correct local inequalities, free-trade is de- cidedly preferable. The possible case of importations to be sold at a loss, or "slaughtered," does not weaken this general conclusion. VIII. Protection is advantageous by securing a Near Market. — We have seen how much stress protectionists lay on the benefits afforded by having a market close at hand. Some of the arguments previously noticed (especially Nos. 2 and 3) have this as one of their aspects. But a more special advantage attributed to a reduction of distance is the saving in the cost of transport. Carey frequently dwells on the absurdity of sending cotton to England and re- importing it in the manufactured state, instead of carrying out all the operations at home. It is plain that the expend?" ture on transport is a loss to the communities concerned L 146 COMMERCE OF NATIONS. they would be the richer if this expense could be avoided ; , but it ought to be equally plain that the expenditure is not \ incurred without an object. Transport may be regarded \ as the final step in production, viz., the placing of goods at I the disposal of the consumer. The cost is indeed a de- ^ duction from the gains that foreign commerce gives, and when this cost equals the gain the trade ceases. To sacrifice an advantage because it is accompanied by some drawbacks is not a wise or economical course to pursue. The diminu- tion in the cost of carriage that modern inventions have produced, shows how the development of exchange is dependent on facilities for transport. Moreover, the objec- tion would apply with quite as much force to internal trade. If cost of carriage be an objectionable outlay, it is as bad when charged between Chicago and New York as between New York and Liverpool. IX. Protection helps to prevent Exhaustion of Superior Soils or other Natural Agents. — This argument, which is chiefly applied to new countries or to those that export raw produce, is deserving of attention. It appeals at once to economic and to social considerations of very great import- ance. In its earlier form it was based on the "earth- butchery " that was said to result from the rude agriculture prevalent in new countries. The American farmer raised successive crops of wheat without any regard to the drain on the natural fertility of the land that he cultivated. The export of wheat was in fact an export of part of the fertility of the country. A protective system that stopped the export was contrary to the immediate interests of the exporters, but in accordance with their permanent economic welfare and that of the community. The state was bound to take the larger aspects of the question into account, and restrain ECONOMIC ARGUMENTS FOR PROTECTION. 147 the selfish action of individuals in order to promote general utility. The same line of reasoning is still more unreservedly applicable to mineral exports. The coal of England or the copper of Spain is limited in quantity, and each ton sent abroad leaves less available for the future. The husband- ing of important natural agents is certainly a justifiable policy. It is much more difficult to show that protection is the proper mode of accomplishing the object in view ; it can only be used with regard to that small part of the products that enters into foreign trade, and it is, further, extremely indirect in its operation. To impose duties on imported manufactures to stop the export of corn, or on the import of corn to reduce the export of coal, is at best inadequate as a remedy ; nor can we believe that its advocates have much faith in the policy. X. Protection checks the Necessity of Recourse to Inferior Soils. — The preceding argument has naturally suggested the present one. Soil exhaustion is always disputable, and can be avoided by proper methods of cultivation. But the continuous export of raw produce is much the same in its effects as an increase of population. The import of food stuffs has admittedly the effect of confining cultivation to better soils, lowering prices, and keeping down rents ; the export of such products must have the opposite effect — /. e. it will bring inferior soil into working, raise the price, and increase rents in the exporting country. Some of the strongest reasons for free-trade in an old country such as England are thus able to be employed on the other side in countries that export raw produce. The interests of the labourer as a consumer of food, and of the capitalist, so far as the rate of profit is lowered by the COMMERCE OF NATIONS. need of recourse to inferior agents, become opposed to unrestricted exchange. It is perhaps an obscure conscious- ness of this fact that leads the more intelligent of the American and colonial artisans to favour protection. While recognizing the truth of the foundation on which this objection to freedom is based, it is at the same time well to remember that it cannot be taken as an isolated fact. The accom- panying circumstances deprive it of much of its force. In the first place, the normal growth of population will, inde- pendently of free-trade, lower the quality of the worst soil cultivated. Again, the increased cost of food is partly compensated by the greater cheapness of imported goods. If the labourer pays more for bread, he pays less for clothes. The increase of rent, moreover, is an addition to wealth, or, at all events, a recouping to the community of part of the loss. Another circumstance is also important. The necessity of using inferior soils so far reduces the superior advantages of agriculture, and makes it easier to engage in manufactures; so that those who desire diversity of industry and the formation of a developed society, ought not to object to a process that will lead to the realization of their wishes. The effect, too, is not all in the one direction ; the law of diminishing returns on which the whole movement depends is operative in a great variety of industries. Even the newest countries import some kinds of raw products. The United States under free-trade would probably have no inconsider- able import of agricultural and mineral products, and would so far be benefited, not injured. These several qualifica- tions minimize the weight of what is at first sight a forcible as it certainly is an ingenious argument. XI. Protection secures Employment for Labour. — We ECONOMIC ARGUMENTS FOR PROTECTION. 149 have now to pass to a different group of arguments, viz., those that deal with the interests of the working-classes. Where political power is widely diffused, it is this side of economic questions that receives most attention. The claims of labour are always kept to the front, and the policy that appears to aim at their satisfaction is sure to be popular. A system that professes to increase employment and provide larger wages for the workers has the strongest hold on the public mind ; consequently the very commonest part of the protectionist case is that it supplies an additional field for labour in the industries that it brings into being. Fresh industries require labour, and this increased demand, as in the case of other commodities, raises its price or wages. Though very persistently repeated, the contention rests on a somewhat easily-exposed fallacy. Whatever theory of wages be adopted, it is certain that the mere existence of an industry under protection will not increase their amount. If wages depend on capital, there is no evidence that the amount of capital will be increased ; if they are measured by the productiveness of industry, protection does not increase the total produce, and therefore does not raise wages ; and even on the popular belief that wages depend on the demand for commodities, protection, though it creates a home demand, shuts out a corresponding foreign demand in the reduction of exports that its operation on imports must lead to. An import of cotton goods or steel rails by the United States gives a demand for corn, meat, or other products to pay the foreign producers of the imports in question. A reference to the primary facts of exchange (chap, ii.) suffices to dispose of this argument, which is indeed one of the weakest of protectionist contentions. XII. Protection maintains High Wages.— Next in the ISO COMMERCE OF NATIONS. present group of arguments is the familiar *' pauper-labour '* plea. To shut out the competition of cheaper labour is the avowed object of American and colonial protection. The effect of free importation — say the upholders of the restrictive policy- — will be to bring down the prices of commodities to the level prevailing in the cheapest country ; but as wages come out of the price of the product, they in all countries must descend to the standard obtaining in the cheapest country — /. e» under free- trade American wages would fall to the English, or perhaps the Belgian, or even the Chinese rate ! Those who accept such a view would find it hard to account for the different rates of wages in England, Ireland, and India in the absence of all protection. Nor is it easy to understand the high rate of wages in New South Wales or in Victoria in her free-trading period. But general principles also show the error of the belief. The importation oi goods will not lower wages ; they can be affected only by the immigration of fresh labourers. A pro- tective tariff that shuts out commodities, while it allows the free entry of foreign labourers, is not contrived in the interest of native workers. The absurdity of the position can be shown in another way. The staple industries of a country have to export their products at the price obtaining ia the market of the world. The farm-hand in the United States gets higher wages than the same class of labourer in England, but the price of the American product is not higher than that of England. The truth is that high wages are the result of superior efficiency of labour, and this is naturally at its maximum in a new country with natural resources not yet fully developed. XIII. Protection is rendered Necessary by High Wages. ECONOMIC ARGUMENTS FOR PROTECTION. 151 I — To contend that protection makes wages high, and then to advocate protection because wages are high, is a rather ; circular process of reasoning; but both pleas are brought ' forward in support of a protective system. The error of the former is, it is hoped, now plain, but there is more truth in the latter. The general productiveness of industry deter- mines whether wages shall be high or low. Some industries are, however, less suited for a country than others. Under freedom such occupations would be abandoned altogether, or contracted to profitable limits. If it is desired to have them on a large scale, it is necessary that some artificial encouragement should be given. The imposition of a protective duty will probably lead to a higher rate of wages in the protected industries, and enable them to be carried on. The general rate of wages will, on the other hand, be reduced so far as labourers are purchasers from the protected industries, while the total productiveness of the community will suffer through the diversion of labour and capital to comparatively unsuitable uses. That high wages are a bar to the prosecution of some forms of industry is undoubtedly true, but this only shows that there are other and better openings for industrial activity. XIV. Home Trade is more Profitable, as it gives double Employment to Capital. — Readers of Adam Smith will remember the discussion in the Wealth of Nations xt^-^tc\AXi% the relative advantage of different uses of capital, and the conclusion that the home trade replaces two distinct capitals, thus differing from foreign trade, which replenishes only one domestic capital. The same line of thought recurs in protectionist writings. The exchange of American corn or cotton for foreign cloth or linen involves only the employ- ment of the capital used in producing the exported cotton 152 COMMERCE OF NATIONS. or corn. If the exchange had been for American cloth or Hnen, two capitals would have been replaced, and profits and wages would have been earned by Americans on both parts of the transaction instead of one going to foreign producers. Thus by another road we reach the "home market" argument. The oversight of those who adopt it is readily apprehended. On home trade there is plainly profit, as it is said, " at both ends," for the simple reason that there has been investment " at both ends " also. Capital and labour can at a given time have only one employment ; the choice lies between producing for home consumption and for export. What is used for one purpose cannot be available for the other. The point to determine is in which wages and profits will be higher. Protection does not of itself increase the amount of productive power ; it, as we have so often noticed, only alters its direction. XV. Home is more extensive than Foreign Trade, and therefore the Loss to Producers by lower Prices is greater than the Gain on the small quantity of Imports. — This case has been illustrated in the following manner. Suppose the total consumption of woollen goods in the United States to be $250,000,000, and that what costs $3 if pro- duced at home could be imported for $2. But with free-trade it would be impossible to import so large an amount owing to the difficulty of payment, therefore it is probable that 10% would be imported, the remainder con- tinuing to be produced at home. The fall of price would extend to the whole product, so that the expenditure on woollens would fall to $166,000,000, with very disastrous results to the American producers of woollens. The com- paratively small importation would disarrange the whole domestic market. ECONOMIC ARGUMENTS FOR PROTECTION. 153 The foregoing illustration, in order to do justice to it, has been taken directly from an able protectionist writer. That it bears its refutation with it can be readily shown. First, there is no difficulty in importing a larger amount, or in paying for it by the export of commodities ; but admitting that there were, it is clear that the price of woollens could not fall unless the conditions of the home industry allowed of its being profitably worked at the lower price. The supposed loss to the woollen manufacturers would mean an equal gain to the consumers, who could employ their $83,000,000 (one-third of $250,000,000) in expenditure on other commodities. As given, the illustration would show that the woollen manufacturers had acquired a monopoly by the aid of protection. XVI. Protection prevents an Unfavourable Distribution of Money. — The old mercantile ideas about the drain of money and the unfavourable balance of trade, the dread of an excess of imports, and the like, have been inherited by our modern protectionists. We need not discuss the cruder forms of the money fallacy, it is sufficient to refer to the general principles of the subject (chap. iii.). Some of the more enlightened advocates of protection who reject the vulgar belief in the magical efficacy of money yet claim for the mercantile doctrine a fragment of truth. Though a permanently favourable or unfavourable balance of trade is impossible, there may be a temporary disturbance of the conditions of foreign trade that will necessitate a large export of gold. As the whole system of banking and credit has a stock of the precious metals for its ultimate support, the stability of the system may be, and often has been, endangered by such a call on its resources. When carried beyond a certain point, a monetary drain brings about a 154 COMMERCE OF NATIONS. commercial crisis with all its attendant losses. More par- ticularly in an agricultural country is there the risk of such a drain destroying the value of the greater part of the national property. To meet the evil, a protective tariff that will reduce importation may be the best remedy. The industrial revul- sions in the United States and on the Continent during the first half of the present century are used to support this general argument. The crisis of 1837 — 1839 was ascribed by Carey to the action of the low tariff of 1832. The importance of preserving a sufficient reserve cannot be questioned, and a sudden disturbance of the normal balance of imports and exports is likely to produce evil results. A great excess of imports must be paid for at some time, and if the time of payment is delayed, the use of credit for the purpose is not obtained free of charge. Economic forces are sure to act, but their working may injure a great number of persons. The difficulty that besets the use of this fact in support of protection is the absence of any evidence that the evil can be thus remedied. Under any form of commercial policy the amount of imports or of exports may vary, and a sudden drain of money is quite as likely to occur in a protectionist as in a free-trading country. The nature and cure of the economic disease known as a commercial crisis belong to a different part of economics. The most severe crisis and the most protracted depression ever known in the United States were in 1873 — 1879 under the high war tariff. XVII. Protection is expedient in heavily-taxed Countries. — The last of the mainly economic arguments that we need consider is the old plea that heavy taxation makes protection requisite. The weight of taxation in England was a favourite argument in support of the Corn Laws, and ECONOMIC ARGUMENTS FOR PROTECTION. 155 at present the burdens of France are alleged as a reason for the increase of protection. The grounds on which home taxation is supposed to justify the use of protective duties are somewhat confused. On the one hand there is the idea of equalizing the conditions of competition between home and foreign producers, and on the other the wish to make foreigners contribute to the national exchequer (see No. 6, p. 1 43). Ought not the foreigner to pay a part of the expenses of the Government whose market he frequents ? The case is thus made to rest partly on economic but also partly on moral grounds. Neither is very convincing. The pressure of protective duties falls mainly on the home consumer, and an additional charge is not the best way of alleviating an already heavy load. The great difficulty of making foreigners contribute to the national revenue, and the certainty that it cannot be accompHshed by the use of protection, make it almost superfluous to discuss the question of justice. But it may be remarked that foreign producers have their own taxes to pay, and are not specially benefited by the adminis- tration of the country to which they export. The Lancashire cotton manufacturer gains as little from the Government of America as the American farmer from that of England. The pressure of taxation, taken as a whole, may be regarded as the cost of working the national government. This pressure has to be divided among the citizens, and comes from their income. Taxation does not, in fact, form a part of the expenses of production of commodities, except when directly imposed on the article, in which case an equivalent customs duty should be charged on its import. Such are the chief arguments appealing more or less to economic considerations that have been presented in de- fence of protection. They have been selected in order to 156 COMMERCE OF NATIONS. show the strongest points of the system, and with the desire to put them in their best form. Several of the more_ obvious fallacies have not been mentioned, it being desir- able to deal only with such arguments as possess some force or plausibility, and have been adopted by representative pro- tectionists. Two general remarks may perhaps be made respecting those that we have examined. I. It is not always easy to draw a precise boundary-line between the different heads — e» g, the infant industry argument (No. i) shades off into the plea for development of productive powers (No. 2). The encouragement of a steady market (No. 7) is closely akin to the prevention of fluctuations that lead to commercial crises (No. 16). The grouping is as far as possible based on the principle of putting related arguments together, e.g. the wages arguments (Nos. 11, 12, 13) are so placed It is, however, characteristic of wholly or partly fallacious arguments to in this way blend and prevent com- plete and precise separation. II. It must have occurred to the reader that the several pleas do not harmonize. That protection lowers prices (No. 5) is a statement that can hardly be reconciled with the assertion that it raises wages (No. 12), or that home producers would be ruined by the fall in prices that free-trade would cause (No. 15). Nor can it be reason- ably maintained at the same time that protection raises the value of land (No. 3) and lowers rent (No. 10). These dis- crepancies are partly due to the existence of different schools of protectionists, who are at variance on such general ques- tions as the law of rent and of population, and thus reach their conclusions from different premises ; but it is still more the result of the position of the protective policy as a popular belief in which contradictory arguments can be combined with little or no sense of their incongruity. j^, CHAPTER XIII. NON-ECONOMIC ARGUMENTS. — POLITICAL AND SOCIAL PROTECTION. The non-economic side of the protectionist case next claims our attention, and this is often regarded as its strong- hold. It is plain that economic arguments pure and simple cannot be decisive. A protectionist may accept the free- trade doctrines so far as wealth alone is concerned, but he may deny that the increase of opulence is the sole or even a principal end of national policy. He may hold, with Adam Smith, " that defence is of much more importance than opulence,*' or his ideal society may be one in which it is not desirable to have great masses of accumulated wealth. And this is just as true of the opposite sentiment. A free-trader may think that the economic arguments for protection have a good deal of weight ; he may believe that by protection new industries would be fostered and the stage of manu- factures and commerce more speedily reached, and at the same time hesitate to gain these advantages by the instru- ment of protective duties, with their corrupting effects on politics ; or he may even think that a ruder and poorer state of society is preferable. Still, on the whole, there can be no doubt that most men regard the increase of wealth as advantageous. It implies 158 COMMERCE OF NATIONS. greater power over material resources, and greater capacity for dealing with the various evils that beset mankind. We may take for granted that the policy which best promotes the production of wealth is, other things being equal, that to be adopted. The social and political advantages of a policy must be weighed against its economic disadvantages, if such there be ; and the final determination ought to be guided by the result of these calculations. The task is, however, one of extreme difficulty. To estimate the action of a given policy on material progress is not quite a simple matter ; the indirect effects cannot easily be traced and measured ; so many other agencies are at work altering the condition of society and increasing or counteracting the operation of the special force under examination. But the problem is at least a definite one, and attempts at measurement may be made with some approach to probability. The combination of other social ends makes this almost impossible. How shall we balance national security against an increase of wealth ? Or how shall we say that an increase in material comfort is more than a recompense for deterioration in morals ? Or even keeping to things more nearly comparable, what amount of wealth ought to be sacrificed to the attain- ment of a certain advance in industrial organization ? What, e.g., would be a sufficient price to pay for the acquirement of the factory system ? The vagueness and indefiniteness of such problems are in a large measure the reason for the division of opinions on the question of free-trade and protection. If the discussion were limited to the economic ground, notwithstanding the ingenuity of some of the arguments for special limitations on foreign trade, we believe that the general expediency of the system of free exchange would have been accepted by POLITICAL AND SOCIAL PROTECTION. 159 competent opinion, and have impressed itself on the popular sentiment. The power of appealing from this narrower and more precise issue to the social and political consequences that must always occupy so large a part of the statesman's attention, has been the strongest of protectionist weapons. Greater room has been given for the influence of sentiments such as national pride and jealousy, for hopes of moral and social improvement by an active policy on the part of the state, and the various economic arguments for protection have seemed to gain in strength from these questionable supports. By a judicious mixture it is possible to prepare a very effective case for those who are desirous of being convinced, and one which has decided attractions for all who do not care for a strict and logical method of reasoning in social matters. From the very nature of the case it is impossible to classify the non-economic pleas for protection as we have tried to do with those dealing mainly with the economic part of the question. Two great groups can, however, be sufficiently- distinguished. We may separate Xht politicaliiom Xh^ social^ and deal with each separately. The foundation of protectionism is, as has been noticed (p. 118), the idea of nationality; and it is therefore fitting that an appeal to national independence should be one of its main political arguments. \ The state of war is one of separation from the hostile nation; all commerce ceases, and so far as each of the belligerents has been previously supplied by the other, it is now compelled to rely on its own resources. Further, one of the most effective of warlike measures is the hindrance of the enemy's commerce either by blockade or by capture of his merchant ships. A pro- tracted state of war may thus force a nation to supply its needs exclusively from its own territory, and if it has l6o COMMERCE OF NATIONS. previouly had widespread commercial relations, the shock and resulting disorganization to the economic system may be very severe and dangerous. Where a large part of the necessaries of life and the raw materials of industry is obtained through foreign trade, the possible evil is at its height. England at present gets three-fourths of its wheat supply from abroad, all its raw cotton, most of its wool, and a great deal of its iron-ore. An absolute closing of commerce would apparently entail starvation, and the Lancashire cotton famine shows the evil of a check to any one large import. Indeed, the greater the advantages of foreign trade the greater will be the loss and suffering from its cessation. It is this condition that gives force to the protectionist argument under notice. If war may at any time produce such an evil, would it not be wise to take precautions before- hand against such a state of things ever becoming actual ? Economic autonomy is as important a weapon as political energy or military and naval power. The strongest army or the best-equipped fleet will be useless if the supply of food runs short, or if the industrial functions are paralyzed by want of sufficient raw materials. The maxim, " In time of peace prepare for war,*' will cover the application of pro- tection for the purpose of securing an adequate supply of food and raw materials from the national territory. Such was the best argument in favour of the English Corn Laws. With the experience of the great continental wars (1793 — 1 81 5) fresh in men's minds, there was some excuse for the effort to make the soil of England supply food for its popu- lation. Many of the protective measures of other countries are defended in like manner. Russia, e.g., can urge the need of manufacturing industries to enable her to be independent of German and English importations. The United States POLITICAL AND SOCIAL PROTECTION. i6i claim by protection to have acquired manufacturing industries that relieve them from the necessity of recourse to the English market. A great variety of commodities may seek protection on this ground. Salt, for example, is protected in France to encourage a home production that would be useful in time of war. The same sentiment gives support to the idea of a commercial union of the British Empire. Almost every important commodity could be produced within that extensive area in sufficient abundance for the needs of its existing population, and dependence on foreigners would be avoided. The protective duties of the projected Zollverein would be an insurance in view of war. This general argument acquires greater force with regard to the materials used in the conduct of war. A nation that draws its supplies of arms and ammunition from abroad would be ill-prepared to enter on a war with the country from which its supply came, and this case may be extended to ships and their equipment. The instruments of war are beyond question the most essential objects for the sole disposal of the nation, and what contributes to their formation is so far entitled to the same privilege. Such was the reason for the English Navigation Laws, and it was on this ground that they won approval from Adam Smith and J. S. Mill. We have endeavoured to state as forcibly as possible the main political argument against freedom of trade. Its importance will plainly vary with the state of society. When wars are frequent and international relations in an undeveloped condition, economic independence is an essential of national life. )The whole system of life has to be adjusted to the requirements of warfare, and a policy M i62 COMMERCE OF NATIONS. that checks the growth of foreign commerce and the inter- dependence of nations that is its concomitant appears primct, facie desirable. But as the need for isolation becomes less, and as the industrial activities grow, the wisdom of restriction is less obvious. Even in the seventeenth and eighteenth centuries the advantage of free commerce probably out- weighed any loss that a sudden stoppage would cause. For the last hundred yearsjjie case for free-trade has been steadily gaining ground.^^^Jp nation is likely to be at war with all the world J^nd the supplies of necessaries come from many different places. With modern facilities of communication, a blockade of a whole country is inconceivable. There never was a community less fitted to bear the sudden pressure of isolation than the Confederate States, and yet, though rigorously blockaded by sea and surrounded on land by the far more numerous Northern armies, they were able to carry on hostilities for four years. A nation with a more developed social life would have still greater power of resistance. But if it is at all possible for a country to bear up against the effects of war through the stoppage of trade, to hinder that trade in times of peace is undoubtedly inex- pedient. It means the inflicting in a minor degree and continuously what produced temporarily by the act of an enemy would be regarded as a serious misfortune. Moreover, the creation of a large commercial intercourse tends to reduce the chances of war in the future. In any country that exports to another, the exporting merchants and the producers from whom they obtain goods have a strong material interest in the preservation of peace. The countries that supply the United Kingdom with food would suffer by any check to that trade, and those connected with the trade may be counted on as friends to a peaceful POLITICAL AND SOCIAL PROTECTION. 163 settlement of disputes. The extension of international trade thus gives solid guarantees for the maintenance of peace, and is so far a valuable investment quite apart from its direct benefits. A still more important influence is that of neutral countries ; to them war means vexatious restraints on their normal trade, but it also, where the previous lines of commerce are closed, affords new opportunities for profit ; and, therefore, while the commercial interests of all countries favour peace, they are after the outbreak of war prepared to supply the belligerent whose own trade is most impeded. These are powerful forces, all tending to prevent the exclusion of foreign supplies. Food, we may rest assured, would even in the crisis of war come to England in {considerable quantities. We may therefore conclude that ^ general policy of restriction as a preparation for the privations of war is entirely out of date, while at the same time we recognize the element of truth contained in the protectionist view. It may be said that the course of events has decided the question. A policy of economic isolation is not practicable, while anything short of it would be ineffective. To stop the English trade in corn and cotton would be too evident a piece of folly for any government to attempt it ; the best hope lies rather in its increase and in the widening of the area of supply, by which the danger of interruption will be reduced to a minimum. The impolicy of navigation laws in the present state of economic development is also certain. The carrying trade of the world tends steadily to pass into the hands of those who are willing to conduct it on the cheapest terms. If the trade of any country be confined to its own vessels, there must be so far a sacrifice of advantage that will impede its progress. A measure of legislative restriction cannot call a i64 COMMERCE OF NATIONS. mercantile marine into existence unless there are other favouring conditions, and with these the chances of growth are better under freedom. What is gained in one direction will be more than lost in another through the enhancement of cost that shipping laws bring about. The repeal of the English Navigation Laws (p. 62) in 1849, though regarded with apprehension by the ship-owners, was an aid in the progress of the English marine. Warlike implements would seem to present an exceptional case, though here also perfect freedom of trade tends to counteract the evils that appear so certain to result. The supply of weapons is now an established industry in several countries, and there is an open market for belligerents in neutral territories, subject to the penalties that contraband trade draws down. In any case, such measures of defence as prudence suggests can be carried out without recourse to protection. To encourage political isolation might have, at one time, been looked on as a settled rule of state-craft. That France and England were "natural enemies," and that it was desir- able to erect barriers between the two countries, formed part ^ of the mercantile creed, and if the goodness of the end be /conceded, the method of protection certainly conduces ; towards it. It was as much on moral and political as on ■ purely economic grounds that Cobden advocated freedom ;' of trade. The tie of material interests would, he felt, lead to I a better understanding between nations. Those who desire i that harmony should not exist, are therefore correct in suggesting a restrictive policy in order to retard it. Though such a belief is not consciously professed in any modern country, there is a curious revival of something similar in the extremer protectionist party in the United POLITICAL AND SOCIAL PROTECTION. 165 States. Their position is, however, as much social as political, and furnishes a convenient passage to the discussion of pro- tection as a social agent. The advocacy of protection in America has all along been strongly coloured by anti-British feeling and has had a leaning towards war. Carey, e.g.^ hardly concealed his belief that a war between England and the United States would be beneficial to the latter, and the earlier protective tariff of 18 16 was the direct result of the war of 18 1 2. At present the exclusion of foreign goods is regarded as a mode of forming and maintaining a higher civilization. The old nations of Europe are, it is thought, so different in their environment and organization that it is better to limit carefully the points of contact and allow the new society to expand without the influence of less advanced societies. Protection has thus a social object, to be attained by what is substantially the old idea of political exclusiveness. Other social aims have also been sought by the aid of protection. The economic argument for diversity of occu- pation (pp. 138 — 141) can hardly be separated from the social one. To promote the increase of town populations in new countries, and to raise the standard of culture, has been a primary aim of the more thoughtful protectionists, and has even impressed their critics. Again, the preservation of an upper class to discharge the \ political functions that an aristocratic society needs, was a jl favourite Tory argument for the English protective system. ' The Corn Laws were in the eyes of many the firm£St_suppQri, of "the Church " and the House of Lords. More limited examples of protection for social ends are duties imposed to cover native producers from the competition of those in other countries where less provision is made for the interest of the workers ; factory laws restrain employers in various i66 COMMERCE OF NATIONS. ways, and duties to counterbalance their effect on the pro- ducts of countries where like regulations do not exist, have been proposed on social grounds. Such also was the English differential duty on " slave-grown " sugar that ex- isted for some years before the total repeal of the protection to colonial sugar. A protectionist policy for the furtherance of social objects does not admit of the same definite measurement as if it were imposed for economic purposes. The onus of proof, however, rests on its supporters ; and they have to make good three separate points, viz., that the object is desirable, that protection will be effectual for the purpose, and finally, that there is no other and better method available. The application of these tests would restrict the use of the particular agency to very narrow limits. Systems that aim at exclusion may be unhesitatingly rejected. With the introduction of steam-ships, railways, and telegraphs, the possibility of forming a peculiar national civilization came to an end. To expect that the United States can gain any social advantage by shutting out European products is not to be thought of. The interaction of the various nations, in both the material and moral spheres, is the strongest agency of progress in the modern world, as it is one of the most indisputable facts not to be ignored by any wise or prudent policy. The narrower and apparently more reason- able systems that seek to increase either manufactures or agriculture, where one or the other is deficient, are practically in the same difficulty. The general movement that economic forces bring about is not easily controlled. | To foster the growth of towns in America or Australasia "seems to be a task as superfluous as it is questionable, and on the other hand to restore agriculture to its old pre-eminence, or even to POLITICAL AND SOCIAL PROTECTION. 167 keep it up to its present extent in old countries, is both difficult and of doubtful expediency. The most plausible case is perhaps that in which pro- tection is proposed merely as a temporary measure, in order to alleviate the sufferings of producers during a transformation of industry. Most continental countries have employed duties on agricultural produce partly with this object. The loss that a sudden disturbance of economic conditions inflicts is so serious that it may lead to political or social disorder, and the state may have reason to interpose in order to spread the process of change over a longer time. Put in this way, the use of protection appears fully justified, but even here there is a vital condition left out. The duty is imposed ostensibly to give time for adjustment, but its real effect is to encourage persistence in the industry doomed to decline. Instead of taking warning, those employed in it begin to hope for further state favours, so that the requisite change is checked rather than smoothed over. In most cases there is, besides, little need for this artificial cover ; industrial ' changes are usually spread over a series of years. The latest instance — /. e, the recent agricultural depression due to American imports — is a very good illustration. Very often it happens that the supposed decline is due to a bad organization of industry, and that foreign compe- tition is the best stimulus to the removal of the defects. Protection has the bad result of removing this natural remedy, and then it simply perpetuates the evil. Antiquated methods of production are continued until perhaps it is too late to effect a change that, carried out at an earlier time, might have preserved the home industry by making it able to meet competition. Protection, as a set-oflf against legislative restrictions, is at l68 COMMERCE OF NATIONS. first sight a carrying out of the free-trade principle. Particular excise restrictions are always counted as equivalent to so much taxation, and that additional amount is imposed on the foreign product. Factory laws would naturally come under the same class, but in this case the difficulties of a counter-balancing duty are very great. It may be that the regulations in question do not reduce production, inasmuch as they increase the efficiency of the workers. If there is no diminution of production, there can hardly be any ground for compensation for an imaginary loss. Again, the real position of foreign industries cannot be accurately ascer- tained, and will probably be different in each country; it would, therefore, be necessary to have duties varying accord- ing to the country from which the import comes. Then, if a protective duty be just for the home market, equivalent bounties ought to be granted for export ; but the plan of giving, say the English cotton manufacturer, a bounty on export equal to the increase of cost that the English Factory Laws place on him, and making that vary according as the competition that he meets is German, Swiss, or Belgian, may be dismissed as impracticable. There is, however, a deeper reason against the use of protection for this purpose. Regulations with regard to industry are established in the interest of society. Each occupation has to submit to them as part of the law of the society ; they impose no unjust burden on a particular industry, but are rather designed to prevent injustice. To claim compensation for not doing what the law forbids is not an admissible plea. It may be urged that otherwise the industry will perish, but to this the plain answer is, that unless it can be carried on under the restraints necessary for the well-being of those engaged in it| it is better that it should. The hope that other countries POLITICAL AND SOCIAL PROTECTION. 169 may be led to reform their legislation by the use of protection against their products is a vain one ; they are far more likely to believe that commercial jealousy is at the root of the policy pursued, and to avail themselves of their assumed advantages to the full. The political and social aspects of the protective policy as just considered do not, taken broadly, add much weight to the case made for it. Allowing that some of the views that it presents are liberal and enlightened, and appeal to the best feelings of the statesman and the ordinsjxy citizen, it at the same time fails to make good its claim to advance the true interests of society. To believe that in any modern state either military power or social progress will be furthered by a restrictive system is not reconcilable with the facts of experience. The balance of probability is in favour of freedom of commerce, even with its inevitable drawbacks in some directions. CHAPTER XIV. THE OTHER EXPEDIENTS OF PROTECTION. Duties on imports take so prominent a place in the \ system of protection that other modes of stimulating f , national industry have been comparatively neglected, f fi-C. though they may claim a greater antiquity, and have, in many ?^^ instances, quite as much show of reason. Duties on exports (^^ might, for example, prove a most effective encouragement to -^ ^ certain forms of industry. Just as England sought for a J long time to retain native wool for her own manufacturers r% ^ by forbidding its export, so the United States might now 1^- ^' restrain the export of cotton and give American producers/ '9 p a considerable advantage. Still export duties have never Id ir^ been in favour with protectionists ; the desire of selling as i much as possible has been too strong for them ; and the ^ "^ danger of encouraging competitors to seek new sources of ^ ^ supply has been sufficiently realized. The recent revival of ^^ protection the civilized world over has not restored this V ! ^ part of the older policy. ^ ,^^ Somewhat different is the position of another prominent ^ f> feature of the mercantile system, viz., the employment of A bounties on exportation. If it be an object of national THE OTHER EXPEDIENTS OF PROTECTION. 171 policy to increase the amount of exports, nothing can better assist that aim than a payment to exporters ; they will be saved a part of the expense of production, and will naturally send larger amounts abroad, supplying foreigners on cheaper terms, since they are subsidized for so doing. As an encouragement to native industry and a mode of increas- ing the quantity of exports, the payment of a premium on exports is unquestionably effective, so that if these were the sole ends of the protective policy, it would doubtless be extensively employed. The modern system of protection has, however, a financial as well as an economico-political side. The increase of duties in Europe for the last twenty years has, as we saw (p. 93), been partly caused by the needs of governments. Higher customs duties bring in larger sums to the state, and please producers at the same time. There is therefore a double motive for their imposition. A bounty on the other hand drains the public exchequer, and is necessarily limited in its use. To give bounties to a number of important industries would speedily bring about a national bankruptcy or a revolt against the excessive taxation that would have to be levied. There is another hindrance to this special method of assistance. Protection gains a good deal of its popularity from the obscurity that surrounds the operation of import duties. The losses are diffused over the community ; they, it may be thought, fall largely on foreigners, and it requires an effort to conceive the real cost of the policy. But when the amount of support given to the assisted industries appears in the definite form of a grant of public money, opponents can use these figures as the irrefutable basis of their argument that any interference with free exchange is expensive to the society. Still more would this be the case if bounties were 172 COMMERCE OF NATIONS. granted on production as well as on exportation. American free-traders have often argued that, assuming assistance to be desirable, it ought to be given in this manner, as the nation would then be able to count the cost of the policy, and the real issues would be more easily apprehended. For the same reason protectionists are unwilling to abandon the use of import duties, which command so much popular favour, and are less easily analyzed and tested. The method of bounties is strictly confined to cases where import duties are ineffective, and even in those will be used with much caution and far more readily given up. One example of the use of bounties is afforded by the (Shipping industry. In addition to the partial revival of jher navigation laws (p. 96), France has granted bounties for the construction and navigation of ships, and has been followed by Germany and Italy. The United States have also made arrangements for subsidizing special packet lines. The reasons for assisting this industry are plain enough. A nation's fleet is one of the elements of its strength in war, and the encouragement may be regarded as a part of the cost of defence^, j^ It is impossible to assist by protection ; which, indeed, has rather the effect of discouraging the growth of shipping by increasing the cost of construction and lessening the opportunities for employment. Bounties are therefore an attempt to remedy one of the evil effects of protection, but they attain this end very imperfectly. To counteract the higher price cj materials and the con- traction of imports and exports that protection causes, would require a much greater outlay than any Government would be willing to incur. It does not appear that any serious effect has been produced by the existing bounties ; and so far as ship-building has been stimulated, the THE OTHER EXPEDIENTS OF PROTECTION. 173 advantage has gone to British yards that produce vessels to be registered in France. Far more general interest has been excited in the bounties that so many countries give on the export of sugar. As an important colonial product, cane-sugar from the colonies received differential treatment in England (p. 61), and other countries with sugar-producing colonies followed the same course. The introduction of beet-root sugar was due to the action of protection, and was for a long period maintained by its aid. In order to encourage producers a repayment of the excise duty, calculated on a settled scale, was made in case of export. As technical processes improved, the repayment (or '* drawback ") came to exceed the amount previously paid, that is, it acted as a bounty on export and as an inducement to exertion in the extraction of sugar. No two countries are quite alike in their treat- ment, and the regulations are in a state of incessant change. In France and Germany the duty is levied on the beet, and the repayment made for the sugar. The size of the vessels used in the manufacture is taken as a test in Austria. Another criterion is the amount of juice obtained, but whatever be the particular mode, in all cases a decided advantage is given to the exporter of sugar, who in Russia for some time received a direct and avowed bounty on the quantity that he exported. The consequences of the system have been remarkable, and show in a most instructive way the difficulties that the intervention of Government in respect to commerce is sure to raise. The competition has been such as to lower the price of sugar in open markets below the normal cost of production, and as Great Britain is the principal one, the benefit of cheapness has accrued to the British consumer. 174 COMMERCE OF NATIONS. Both the sugar refiners and the producers of cane-sugar have strongly objected to this state-aided competition, and have advocated the imposition of duties equal in amount to the bounty, or the complete exclusion of "bounty-fed" sugar from the British market. At the same time the cost of the bounty system has made. the Governments that use it desirous of abandoning it as soon as they conveniently can. The Conference of 1888 was produced by these sentiments, and agreed to a Convention (signed by Great Britain, Austria, Germany, Russia, Italy, Spain, Belgium, and the Netherlands), by which the signatories agreed to give no bounties, and to exclude all sugar on which a bounty had been paid from their territories. This proposal met with powerful opposition in England, and the increase in the price of sugar that marked the year 1889 was widely attributed to anticipation of its effects. Consequently the Convention was allowed to lapse, without any effective steps to secure ratification having been taken. Arrange- ments were made by France and Germany for the reduction, and in the case of the latter country, for the ultimate abolition of the bounty, but it was found to be impossible to carry out these projects. The com- plaints of the sugar refiners, and the extreme depression of the West Indian colonies, have brought the matter into fresh prominence. A new conference has been held, though it is unlikely that any very speedy change can be made in the policy of the bounty-giving countries. Other examples of bounties are that granted by New Zealand for sugar production, and by the Argentine Republic for the export of meat; but just as it is hard to decide between what is a drawback and a bounty, so is it hard to say where a bounty ends. If we once go THE OTHER EXPEDIENTS OF PROTECTION. 175 beyond the direct payment for a particular product, we find ourselves compelled to include all forms of assist- ance to industry. Superior means of communication, abundant supplies of land, capital obtained on cheap terms, technical education, all tend to cheapen pro- duction; and if any of these be supplied by state instru- mentality, there is so far a bounty. Thus special export rates on railways or canals, grants of land, or loans of capital on easy terms to exporting industries, or technical instruction in the preparation of exports, will all tend in the same direction as direct money bounties on export. Trans- port charges can very easily be so used. A state-owned or state-regulated railway, by carrying sugar for export at a lower rate, encourages its export as effectually as the state depart- ment that pays a money bonus on the amount sent abroad. We see, in fact, that a protective system can be carried out ; in all parts of the economical policy of a state. The! ''expedients" of the mercantile system were parts of a connected whole, and in like manner modern commercial policy develops on a definite type. If protection be the system in favour, every measure at all touching on economical matters can tend towards the carrying out of restriction. Patent laws, measures aimed against fraud — e, g. adulteration acts and regulation of trade-marks — sanitary regulations, and the innumerable rules that the complexity of modern life makes necessary, may contain within them a protective element. Moreover, the practical application of commercial regula- tions may vary considerably in strictness, and thus two coun- tries with seemingly very similar tariffs may actually differ much. A rigorous enforcement of the Custom House rules, refusal of credit, and especially stringent valuations of imports, have 176 COMMERCE OF NATIONS. all the effect of protection. Amongst the evidence collected by the last Royal Commission on Depression of Trade, we meet with various complaints as to the vexatious restraints on trade by Customs officials, Italy and Portugal being particularly noticeable in this respect. What may conveniently be called ** local protection " is also a factor to be taken into account. Methods of local taxation, and notably that form of it which consists in taxes on commodities (the octroi duties of France and Italy), often retard the passage of goods and afford privileges to the home producers. Dock and harbour dues are also in some instances a restrictive agency. Interprovincial customs barriers are rapidly disappearing, but they too must be mentioned as a further check on trade where they exist. The modern protectionist theory is, as we need hardly once more repeat, based on the idea of nationality, and its propounders therefore aim at removing these favours to smaller groups. The utmost freedom of movement, both of services and of commodities, within the national territory ; rigid protection against all outside competitors; such is, speaking generally, the policy. The system of import duties, bounties, and the other restraints and encouragements is no novelty, but it is in the present age brought into oper- ation with respect to larger and more powerful groups. France, Germany, the United Kingdom, the United States, and Russia are possessed of much greater resources, and permit of a greater amount of free interchange inside their territories than was possible in earlier times. Whether this policy, with its double aspect of external restriction and internal freedom, can be permanent, is a question of the deepest interest, but of its actual vitality there can be no doubt. CHAPTER XV. THE PRACTICAL OPERATION OF PROTECTION. An examination and study of modern commercial policy would not be complete without including some notice of the complications and difficulties that the adoption of a pro- tective system creates. So much of the case for restriction rests on instances of the failure — real or supposed — of free- trade in special circumstances, and on rather vague accounts of the advantages that may be gained by a proper regulation of trade, that it is well to see how the protective system works, and what are the embarrassments that result from it. Free-traders are often met by references to the opposition between " theory " and ** practice," and to the impossibility of applying an abstract doctrine to the very real facts of trade; but the truth is that the distinction between " doctrine " and ** application " is exactly fitted for the pro- tectionist theory. Granting, for the sake of argument, that a valid defence of protection can be furnished by economic reasoning, it may nevertheless be said that the difficulties of reducing it to reasonable practice are insuperable. A policy suited for the modern world must take account of the general conditions under which it comes into operation, and of the probability that some " friction '^ may retard move- N 178 COMMERCE OF NATIONS. ment in the desired direction. It is not protection by itself, but protection with the surrounding circumstances, that has to be studied in order to form an estimate of its probable effects. Some of these difficulties are the necessary result of protection, and are inseparable from it ; others are due to defects of administration, but are so likely to occur that they may be regarded as the natural and probable consequences of the system. The first result of a policy of restriction that strikes the ordinary observer as undesirable is the increase of cost that it causes. Duties on commodities lead inevitably to a rise of price ; the amount of that rise will of course depend on the rate of duty, and the greater or less disadvantage of the competing native industries. Wherever a protective system 1 has been set up, it sooner or later embraces a large number ', of articles in ordinary use by the mass of the people, and makes the conditions of life less satisfactory. If, as is usual in Europe, agricultural products are protected, the necessaries of life become dearer than they would otherwise be, from which it must happen either that the labourers will receive \ lower real wages, or, if they are so fortunate as to get an increase in their money receipts sufficient to compensate for the higher prices, their employers will suffer by the increased cost of production. But even where food is exempt, or need not be obtained from abroad, duties fall on clothing and the minor articles of consumption in such a way as to affect even the poorest. ,; It is easy to pass over this effect of protective duties with the remark that wages are of more importance to the workers than prices, and that employment is the one thing needed. This view, however, fails to notice that the cost of the labourer's requirements is an essential element in measuring the amount of wages that he gets.'^ THE PRACTICAL OPERATION OF PROTECTION. 179 No matter what are the other effects of protection, its action in increasing the cost of commodities must always be carefully remembered and taken into account. That pro- tection is injurious to the consumer is a cardinal part of the free-trade position. The increase of cost through protection is not confined to articles that minister directly to enjoyment. In very many cases the requisites of production are affected. An extensive '" system of protective duties on imports must fall on various home industries. The elaborate division of labour and the complex organization of industry that modern society exhibits have established very close connexions between different forms of production. What is raw material to one industry is the finished product of another, and a duty granted to the latter is a hindrance to the advance of the former. Duties on cotton, wool, silk, and flax are injurious to the manu- , facturers of these materials, as, at the next stage of working up, ! duties on yarns are against the interest of weavers. In like ' manner protection for iron-ore or coal places the smelter at / a disadvantage, and so on through manifold industries. / Other and less direct reactions of protection on production '. may be found. A modern factory is a very complex machine,'" requiring many co-operating conditions for its effective work- ing, from the several classes of raw material that must be obtained, each in due proportion, up to the directing ability and energy of its manager. Any check to the supply of materials, implements, motive power, or labour is a check to efliciency, and diminishes the chance of success. Protection, if largely used, is almost certain to come in as a retarding agency in many industries that are supposed to gain by it. To trace the effects of a duty on a single article, such as coal, all through the industrial area, and see how it operates in i8o COMMERCE OF NATIONS. hundreds of different employments, where at first sight its influence would never be suspected, is an instructive exercise for the student of commercial policy. The primary effect of protection in retarding consumption is perhaps equalled by its secondary effect in limiting many forms of production. These effects are both, it may be asserted without hesitation, injurious to the society on which they act ; but may yet be believed to be compensated by the advantages of the system, which, by stimulating industry and promoting social pro- gress, confers very great benefits. The whole community thus pays a not unreasonable price for what it obtains. This very comforting belief is dissipated by the fact that industries are unequally affected by the protective action of the state. The distribution of labour and capital and the employment of natural agents follow certain lines under normal conditions. Each country develops the particular applications of pro- ductive power in which it has a comparative advantage, and these, it is evident, cannot gain through interference. While the protected industries are in many cases hampered by duties imposed on other products than their own, the great staple trades suffer without any return. Protection can in no way assist the producers of English coal, or cotton goods, French silks, or American wheat; to them it is simply a burden against which their interests will naturally lead them to protest as soon as its real effect is perceived. These oppositions of interest and the impossibility of any adequate reconciliation are by far the most formidable danger that the protective system has to meet. Consumers as a rule are unorganized, and do not make an effective presentation of their case ; their losses are, besides, diffused over the whole community, and can with difficulty be even THE PRACTICAL OPERATION pF PROTECTION. i8i approximately estimated. The producer whose raw material is rendered dearer by a duty, or whose market is narrowed by the limitation of foreign trade that protection causes, feels ; the evil directly, speaks with the weight of practical know- ledge, and uses the very kind of argument that is popular i t with protectionists. The whole policy is in consequence \ ( placed in a dilemma from which it is difficult to escape. It \ ■ must either be applied to all or to very many industries, when I its influence in retarding production will be serious, or it may ! be confined to a smaller number of the more promising I , cases, when it arouses the hostility of the larger number of \ unprotected industries. We can thus explain the history 1 of most protective systems, f Introduced as tentative efforts to encourage, they are by degrees extended to other in- dustries in order to disarm opposition — an extension which in turn leads to new conflicts of interests, and, perhaps, finally to the downfall of the whole arrangement. The English manufacturers, who in the eighteenth century were the strongest supporters of protection, had realized in the present one that it was contrary to their true interest. Such will probably be also the case in the United States in the next half century ; signs of it are already appearing in the restiveness of woollen manufacturers under the duties on raw wool, and in the demand for the removal of the duties on iron-ore. Placed in such circumstances, a tariff to secure acceptance must be the outcome of compromise. Protectionist theory would require either very high protection (amounting to prohibition) all round, or else a careful selection of objects ; its practice is a scale of duties in accordance with the sentiments of the stronger political interests. Small and struggling industries generally come off worst, and the i82 COMMERCE OF NATIONS. prospects of future development are not properly attended to. vThe process of give-and-take on which legislation has to be based is not conducive to scientific measurement of consequences or careful adjustment of means to ends. J Closely connected with this difficulty is the risk of inconsistencies and anomalies in applying the general idea of protection. To fix the suitable rate of duty on each kind and grade of goods is a problem too hard for the most experienced administrator ; and when the incessant changes in industrial processes, the discovery of new commodities, and the varying relations of trade are added, that difficulty is enormously increased. The first formation and the subsequent modifications of a tariff based on protectionist principles are too difficult a work for anything more than very partial success to be attained, and even this is not often achieved. Quite as serious, in some respects, is the inconvenience in the work of administration that results from protection. The multiplication of tariff items makes the levying of the proper duties in accordance with law much harder than is desirable. Importers will seek to get their goods rated at the lowest figure ; if the duty is specific, by placing them under a low class ; if ad valorem^ by under- valuation. The decisions of the United States treasury for a single year amount to several hundreds, many of them turning on the finest points of difference, while in some instances they border on the ludicrous. The uncertainty and confusion that follows is no slight drawback to any benefit from the general policy. Time is lost, and inducements are offered to traders to evade the regulations, or to search for loop- holes by which their particular goods may escape the ostensible duty. These evils are not simply the result of THE PRACTICAL OPERATION OF PROTECTION. 183 iinskilfulness in devising the necessary measures ; they are rather due to the growing variety of trade transactions and the increased number of commodities to be dealt with. Protective duties tend unavoidably to encourage efforts to avoid their payment. Where taxation is purely for revenue, the control of the state is directed to the comparatively small number of industries whose products are taxed so that it can be made effective ; articles to be taxed will be chosen for their fitness in that respect, and the cost will not be excessive. It is otherwise in respect to protective charges. All sorts and qualities of articles have to be made dutiable, and the opportunities for smuggling are increased. In fact, the height to which those duties can be carried depends very much on the inducements that they offer to contraband traders. At periods of exaggerated restriction, as formerly in the case of French trade with England, the smuggler becomes the principal agent for carrying on exchanges. Such are the difficulties and evils of protection so far as internal trade is considered, but its action on relations with outside markets is still more noteworthy. Industries that require the aid of duties to command a sale at home cannot be expected to meet competition where such support is wanting. By the aid of bounties they may succeed in estab- lishing an export at the cost of the public exchequer, but not otherwise. The vigorous and independent part of the national production which is able to compete with foreigners on equal terms, is checked in its expansion by the increased cost that protection, as we have just seen, imposes, and by the difficulty of carrying on a trade in which return cargoes are not easily obtainable. The doctrine that imports and exports tend to balance may seem a theoretical one, but its truth is brought home to every one engaged in conducting i84 COMMERCE OF NATIONS. foreign trade. Thus, as a result of the policy of encouraging native industry, the expansion of one important part of it is materially limited. This effect is propagated over the whole field of industry. The trades that would have gained by increased exports would be in a position to supply capital and business ability for other industries as soon as they became profitable. All the influences of protection have this tendency. Elaborate customs regulations mean loss of time and money, and hinder indirectly the creation of new exports, as they stop directly the growth of imports, v^ To these economical difficulties in the operation of pro- tection we ought to add the social and political results of placing industry in such direct dependence on legislation. Where the imposition of a duty may make the fortune of a producer or owner of some natural resource, and its with- drawal mean lowered profit or rent, the employer becomes perforce involved in "politics,'' in the vulgar sense. The English Corn Laws, the French protective system, and the various American tariffs have all been in part the outcome of the exertions of interested parties. Such relations are evil both for industrial and political life, and have a disastrous tendency to demoralize those concerned. It is not well that a matter so vital as the conduct of industry should depend on political contingencies, nor that the work of legislation should be mixed up with questions of com- fercial loss or gain. Again, in its general social bearings, the attempt to bring about an artificial distribution of industry is open to the gravest objection. The industries that receive cover from the state are, by the nature of the case, the least vigorous and the least suited to hold their own in an open market. } Instead of the division of employments that natural con- THE PRACTICAL OPERATION OF PROTECTION. 185 ditions would lead to, there are either manufactures in countries for which agricultural and other extractive industries are suited, or agriculture maintained to excess where abundant capital and dense population facilitate manufactures. In the former class of cases the tasks of a developed society such as those attendant on the growth ot cities are prematurely brought into being ; in the latter the question of the ownership of land, and the relations of employers and employed, are complicated by the increased cost of food and the rise of rent. All the foregoing considerations are strictly ** national " ; they relate to the position of the protecting country, and take no account of the world at large. But looking at the matter from this higher and wider point of view, it would appear that the general adoption of the restrictive policy involves a loss to all trading countries. To judge of its extent we must take the system of restriction as it exists, and see how in most nations profitable lines of trade are closed by the action of governments. The lowering of duties by commercial treaties (see chap, viii.), and the subsequent growth of foreign trade, gives some indication of what the removal of protective duties would do. Without exaggerating the results of such a change, it is not unfair to assume that it would be equal to the advantage gained by the construction of the railway system. In another respect the parallel is appropriate. Protection and distance are both obstacles to commerce, the one natural, the other artificial, and what transport facilities do to remove the one, liberal legislation accomplishes for the other. Thus by following out the practical operation of the protective system, we see that in economic advantage and in simplicity it is inferior to that of free-trade. Looking at i86 COMMERCE OF NATIONS. the subject in this way, it is scarcely necessary to furnish positive arguments in favour of the latter. We are led to say with Adam Smith that "All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord." CHAPTER XVI. RECIPROCITY AND RETALIATION, Most Englishmen are disposed to accept the truth of the free-trade principle, if carried out universally. Their diffi- culty is rather to understand what seems the obstinate persistence of foreigners in a policy of restriction, though in recent years the revival of protection has suggested to many the idea that there must be something in a system that has been deliberately chosen by so many civilized countries, and produced some heart-searchings among those who were formerly satisfied with free-trade, or at all events with the prosperity that accompanied it. The preceding chapters of this work have been devoted to an exhibition of this modern tendency, and of the causes that have brought it into being, in the belief that such an inquiry is the most effective way of removing any doubts that may be entertained as to the wisdom of the existing English commercial policy. The political interests and the plausible arguments that support protection elsewhere are not on its side in Great Britain. Foreign protectionism has had a further effect on a part of English opinion. It is not uncommon to hear that " free- trade all round is very good, but that one-sided free-trade is quite the reverse," or that, " as foreigners tax our goods, we i88 COMMERCE OF NATIONS. ought in turn to tax theirs." The wisdom of unrestricted commerce is believed to be contingent on its adoption by i the other parties concerned. Two somewhat different views V are, however, often confused. The one which maintains I that free-trade is bad unless other trading countries accept ■? it ; the other that allows free-trade to be good, but asserts I that, either to revenge the injuries inflicted by foreign duties t on us, or to compel their abandonment, we ought to impose corresponding duties on the goods of protectionist countries. The former is usually described as " Reciprocity," the latter as '* Retaliation." Often there is a blending of the two, but in strictness they should be distinguished, as the argu- ments are not the same, and have to be dealt with separately. The *' reciprocity " sentiment is nearer akin to protec- tionism. It assumes that restriction gives advantages to the nation that employs it, at the cost of still greater injury to foreigners. Of two trading countries each gains by its own ; protective regulations, but loses still more by those of its neighbour. A removal of restrictions by both parties will be for the interest of both, but should be a matter of arrangement and strictly reciprocal. This belief is based on i the old idea of trade being gainful only to sellers, but a loss to purchasers. The nations are regarded as being in the same position as individual bargainers, one only of whom is believed to gain by a transaction. The exagger- ated importance attributed to the possession of money assisted in the support of this belief. One country would not allow another to draw on its stock of the precious metals by selling goods, unless it received the same privilege in return. The doctrines of the older system have left deep traces of L; RECIPROCITY AND RETALIATION. 189 their existence, and even in free-trade England we need not be surprised to find that the idea of mutual concession is regarded as essential to the success of free commerce. To the creation of this belief, besides the influence of what may be called popular political economy, other elements have contributed. The policy of imposing duties on goods from a country which surrenders that right, and admits everything foreign on equal terms with home products, has an unfair and ungenerous look about it that rouses national feeling. Foreign tariffs undoubtedly injure British trade in some respects; they close or contract many important markets where profitable transactions would otherwise be carried on, and they are credited with much more power than they really have. Nor have the free-traders themselves been clear of blame in the matter. That other nations would speedily follow the example of England, was the confident prophecy not only of the sanguine and enthusiastic, promi- nent among whom was Cobden, but of so calm and sober a thinker as John Austin, who declared that in ten years that happy result would be reached. This excessive faith in the power of reason and neglect of the causes that gave so strong a footing to protection, both in new and in back- ward countries, were perhaps excusable at the time, but they have certainly had unfortunate consequences. Because it was said that free-trade in England would be followed by free-trade elsewhere, people came to believe that it was desirable on that account, and when the rapid conversion expected did not take place, it seemed as if the measure, having failed of its object, should be given up. There is of course no doubt that none of the leading advocates of free-trade ever thought that its advantage was dependent on its adoption by other countries. Cobden I90 COMMERCE OF NATIONS. and Villiers have both exposed very clearly the error of reciprocity, but the failure of their predictions on this special matter has notwithstanding gone a long way to discredit the policy to which they were appended. But though it is easy to account for the favour with which the reciprocity argu- ment is received, it must be said that as a guide for policy it is wholly erroneous. The advantages of foreign trade result from the supply of articles on easier terms (chap, ii.), and that advantage is realized by the removal of home restric- tions. Were the foreign ones to disappear also, the gain would be greater ; but that undeniable fact does not destroy what is obtained by a liberal policy — it is additional to it. Pro- tective duties are impediments on exchange, exactly similar in effect to natural barriers. It would be as wise to argue that British harbours should not be improved unless American ones were similarly treated, as to maintain that England ought not to give up protection unless the United States did so too. An acquaintance with the elementary conditions of foreign trade shows the utter absence of foundation for the belief in the need of reciprocity. Nor if we follow the argument into details does it gain any additional strength. The fear of an excess of imports, unless the restraint of protection hinders it, can be easily shown to be unfounded. The gain of trade to the com- munity lies in the imports. Corn, meat, cotton, tea, wine, &c. are obtained on cheaper terms, and therefore in greater abundance. Such is England's gain by her commerce with other countries, the larger the imports the greater primct facie is the benefit. \\i imports were to come without pay- ment, they would be pure and unmixed gain ; but in fact the relation of imports and exports is, as we saw (chap. iiiO> governed by definite principles. The proportion \ RECIPROCITY AND RETALIATION. 191 between imports and exports is unaffected by the particular commercial policy of a country. Imports have to be paid for by exports, or by a transfer of claims held by the importing country. The transactions of trade are always reciprocal, and no other artificial reciprocity is required. Another form of this dread of over-importation is that which admits that imports must be paid for, but fancies that the payment will be in money, and will drain the importing country of its cash. The temporary payment for imports by an export of money is not unusual, and a persistent unfavourable exchange can be remedied only thus ; in such circumstances, the export of gold or silver is the export of a convenient commodity. Over a long period the purchase of imports by export of money is evidently impossible. Not to dwell on the fact, that in a few years the whole metallic stock would disappear, the general range of prices in a country depends, with certain important limitations it is true, on the quantity of money in circulation. The export of money reduces its quantity, and therefore lowers prices j but lower prices check, imports and encourage exports. A transient excess of imports or exports will be speedily corrected by a flow of money from or to the country where the disturbance exists. The alarm on the subject of a money drain has, however, some slight foundation, though recipro- city is of as little use as protection (pp. 153-4) in meeting the difficulty. The true method is banking organization. An appeal to experience is probably more effective than any general reasoning in refuting errors as to the relation of imports and exports. Under free-trade, English imports have exceeded exports annually for the last forty years, but so for a long time have French imports been larger than exports. At various periods the United States have had 192 COMMERCE OF NATIONS. larger imports than exports, even with high protection. Similarly with regard to a drain of money. No country has ever permanently been deprived of its currency ; com- pared with the total stock of money, the amount that passes from country to country is insignificant, and its distribution is determined by the requirements of the different nations, and does not need adjustment by the use of duties. Compelled by criticism to abandon these untenable views, the upholders of reciprocity suggest that excess of imports indicates emigration or consumption of capital. The ;^3>3oo>ooo,ooo that have been imported beyond export (p. 29) are looked upon as so much capital gone. It is quite conceivable that a country may be using up its capital, but the state of foreign trade would give no indication of it. The growth of wealth depends on the balance between consumption and production ; what remains after supplying the annual expenditure is the net balance for saving. All available evidence goes to show that Great Britain is accumulating capital on a large scale. According to Sir R. Giffen's elaborate and reasoned estimates, the increase in the decade 1865 — ^^75 was from ;^6, 100,000,000 to ;2^8, 500,000,000, an increase of ;£24o,ooo,ooo per annum; for the decade 1875 — 1885 there was a further increase to ;£"! 0,000, 000, 000 — i. e, ;^i5o,ooo,ooo per annum. The great excess of imports has been accom- panied by a still larger growth of capital instead of being coincident with its decline. Another and perhaps more plausible argument for reciprocity is that which assumes that protective duties fall wholly or partly on foreigners, from which it is not unfairly concluded that such duties should be met by corresponding ones. It has already been noticed (p. 144) that this sup- RECIPROCITY AND RETALIATION. 193 posed shifting of duties to foreigners is one of the arguments for protection pure and simple, and if it were correct it would furnish a justification of reciprocity. J. S. Mill has sometimes been quoted in support of such a policy, but this is due to an entire misapprehension of his meaning. He, in fact, holds that protective duties are purely mischievous ; and declares that with reference to them, "considerations of reciprocity are quite unessential." Duties for revenue differ in this, and where a foreign country taxes us, we may and ought if possible to tax its citizens. Mill's general view may be accepted, though it requires sundry corrections, but it is confined to the subject of international taxation. If pro- tection be as difficult to apply and as evil in its effects as it has appeared (chap, xv.), there can be no warrant for taking pattern by those nations that employ it. Retaliation differs from reciprocity rather in its motives than its method. With those who advocate reciprocity on the ground of unfair treatment by foreigners, the two notions are blended, and their general view has been just considered. But retaliation may be advocated by those who believe that free-trade is beneficial, with the aim either of inflicting punishment on other countries for their unwise and injuri- ous policy, or, more frequently, of leading them to " amend their ways," and adopt a more liberal system. As to the first, it need hardly be argued that a nation is unwise in doing what injures itself, even though it may inflict still heavier losses on others. Something might be said in favour of such a course at a time when states sought chiefly to be richer and stronger than their rivals. The relative wealth of a community might stand higher by reason of the effects of protection, though its absolute riches were reduced. This way of viewing national prosperity is fortun- o i94 COMMERCE OF NATIONS. ately discarded, and therefore all justification for a permanent policy of retaliation has disappeared. To keep up protective duties that injure ourselves and our neighbours, as a punish- ment to them for their unwillingness to become free-traders with sufficient promptitude, is not a policy that can ever win acceptance. Those who have got so far as to see that protection is injurious, will not take long to pass beyond this particular survival of it. Much more persuasive is the second form of the retaliation doctrine. It allows that protection is evil, but it holds that the temporary loss will receive an abundant return in the benefits of universal free-trade. Protective duties may, it is thought, be employed as an instrument of commercial warfare, and like all war, the immediate cost is greater than the returns. Ultimately, however, this relation is reversed ; the objects gained are greater, and repay the earlier expenses. Retaliation, when employed in this way, is analogous to the adoption of protection for immature industries (pp. 133 s^,) where there is also immediate loss for the sake of later benefits. It is beyond doubt the most plausible form of the belief, and in Adam Smith's words, ** it may sometimes be a matter of deliberation" whether the method should not be em- ployed. If there were a fair probability that the use of protection for a short period would lead to complete free- trade, then it may be said that the inconvenience and expense would be amply repaid. To judge, therefore, of the wisdom of retaliation, we have to estimate the chances in favour of its succeeding in the removal of the barriers that it is aimed against. These will, of course, vary in different cases j the strength of the foreign interests affected by the retaliatory measures and the general disposition of the nations to be coerced or induced must be taken into account. The RECIPROCITY AND RETALIATION. 195 problem is, in fact, eminently one for the practical statesman ; but it must be said that there is little evidence of retaliation, or even the milder method of the maintenance of corre- sponding duties being effective. Nor is it difficult to see why it should be so. The existence of protection in a country shows that the governing classes think that it is good at least for themselves. When they are required by another nation to give up their own policy on peril of retaliation, their faith in it is strengthened, and they not unnaturally fancy that the foreign opposition is due to its success. In addition to its fortifying effect on the protectionist creed, retaliation inevitably irritates national sentiment. Economic legislation is one of the attributes of sovereignty ; a state that cannot deal at its will with its own tariff is deprived of this power, and so far comes under foreign influence, it may be for its good, though excited popular feeling will hardly so regard it. As a mode of securing the progress of free-trade opinions or liberal commercial regulations, retaliation is there- fore almost certain to fail. Let us take a particular illus- tration. Suppose that Great Britain were to attempt a policy of retaliation in order to force the United States into a reversal of their present policy. Is it not as certain as any political event can be that it would be resented as a piece of impertinent dictation, and would lead to a still greater increase of American duties ? Would not it be further said that the use of protective duties for the object of reprisal was in fact a confession by a free-trade nation that its system had failed ? So far from bringing free-trade nearer realization, its general adoption would be made still more remote. Such has been the experience of other countries. Canada and the United States have not reached better commercial relations through retaliatory measures (pp. 109, no). The 196 COMMERCE OF NATIONS. recent tariff war between France and Italy is another illustra- tion of their uselessness. The best case for retaliation is where some differential duty is directed against a country that meets it by similar rigour ; but such cases are rare, and are usually settled by negotiation, as the recent example of England and Spain in 1886 proves. One part of the McKinley Tariff Act brought the idea of what is substantially retaliation into the policy of the United States. Special duties were allowed to be levied on certain articles — tea, coffee, sugar, hides, &c. — coming from countries unfairly taxing United States products. This reserved power was regarded as useful in negotiat- ing with South American States. The Tariff Act of 1897 empowers the President to suspend the free entry of certain articles from countries where "unequal duties are imposed on American goods, as also to conclude treaties for a reduction of duties for a limited time, and subject to the consent of Congress." Whether these provisions can be applied in conjunction with the general system of protection is more than doubtful. The effort is however interesting, as showing a new tendency in American com- mercial policy, and one which was exhibited by England in the period immediately preceding the adoption of free-trade. Very strenuous efforts were made by the Peel Administration (1841 — 1845) to conclude commercial treaties on the basis of reciprocity, but the attempt was a complete failure. Mr. Gladstone, who, as Vice-President of the Board of Trade, had charge of the negotiations, afterwards declared that " In every case we failed. I am sorry to add my opinion that we did more than fail. The whole oper- ation seemed to place us in a false position. Its tendency was to lead countries to regard with jealousy and suspicion, as boons to foreigners, alterations in their laws which, RECIPROCITY AND RETALIATION. 197 though doubtless of advantage to foreigners, would have been of far greater advantage to their own inhabitants." The lesson thus received conduced to the change of view on the part both of Peel and Mr. Gladstone, it would be a remarkable paralleHsm if the course of events should be the same in the United States. There are, as Mr. Wells has noticed, other resemblances between America now and the England of 1840 — 1850, notably in the desire of manu- facturers for duty-free raw materials and wider markets for exports. But whatever may be the special successes ob- tained, it is clear that retaliation is a dangerous weapon, costly at the best, and in case of failure hurtful to future sound relations between countries. There is, too, an additional reason for the failure both of reciprocity and retaliation. The views on which they are founded usually arise in developed commercial com- munities. England and the Netherlands can both claim the doubtful honour of possessing a fair-trade party. Exporters very soon see the advantage of removing restrictions on trade, but they also feel keenly the hindrances that foreign tariffs cause. But in such circumstances free-trade is so certainly the wisest policy, that it will be finally adopted without reference to the conduct of other countries. The | more refined protectionist position fully recognizes this. [ Countries that wish to develop manufacturing industries ' will not be deterred by threats of retaliation from more J advanced nations ; they will rather welcome any check on their exports of raw produce as helping the progress of manufactures. This is, in fact, the strongest reason against the use of retaliation by such a country as England. Speaking broadly, and subject to certain exceptions, her imports are food and 198 COMMERCE OF NATIONS. raw materials ; her exports manufactured articles. Duties to be effective should therefore be imposed on the neces- saries of life, or on those of industry, or on both, with the result of injuring the producers, and placing the nation at a disadvantage in its foreign trade. To conclude, retaliation is only likely to be tried in countries that, in List's language, have reached the manufacturing stage. At that stage it is extremely hurtful to the most important industries, and it is altogether ineffective as against communities who seek to create manufactures by the aid of protection. It is consequently doomed to failure as a general method, though in some particular cases it may secure concessions. And what is true of retaliation, also holds good of reciprocity. An offer on the part of France to remove protection if the United States did likewise, would be no inducement to American manufacturers, though unrestricted exchange would be largely beneficial to both countries. Still, when countries are in very different conditions, or in very nearly the same one, there is some prospect of successful arrange- ments on reciprocal terms. A South American state would find its interest in getting a free market for its raw produce in Europe, and in importing manufactures that it cannot make for itself; or two countries such as France and England, or Germany and Austria, may be able to agree on reciprocal reductions of duty. Even under these comparatively favour- able circumstances, arrangements of the kind are very difficult to manage for the reason indicated by Mr. Gladstone. The policy of pure free-trade without reference to the course adopted by other countries is the most consistent, and on the whole, the most effective. When statesmen have got so far as to see the wisdom of reciprocal arrange- ments, they are not far from the true position, viz., that RECIPROCITY AND RETALIATION. 199 free-trade is beneficial even if it is pursued by a single country. As retaliation has been advocated against foreign import duties, so has it been proposed as a means of meeting the other expedients of protection. Duties on exports have sometimes been a reason for heaping additional import duties on the commodity so taxed, with the condition that the import charge shall cease when the foreigner abandons his export duty. Usually, export duties are confined to greatly needed articles, in which case an import duty increases the loss. Still, the reduction of a revenue import duty may lead to the removal of a similar export one, as in the recent case of currants coming from Greece to England. The export duty is, however, too insignificant a part of the protective system, and has too limited an operation to require much notice. Foreign bounties are better known, and have at present more practical interest. Whether it is desirable to adopt measures of reprisal against special encouragements to exports cannot be decided until we consider the effect that they produce on the countries to which the export takes place. At first sight it seems well to take advantage of the expenditure of the bounty-giving countries. Most European nations are, or have been, contributing towards the payment of the English sugar bill, with the result that the consump- tion of sugar in the British Islands has rapidly increased, and far exceeds that of any other country, owing to the lower retail price. Those engaged in the sugar industries, however, complain that they are deprived of profit, and forced to give up their trade in consequence of the state assistance given to their foreign competitors ; they ask, not without plausible ground, for measures to prevent this, or, as 200 COMMERCE OF NATIONS. they put it, "restore true free-trade." The effect of bounties on a particular industry may prove to be serious, and un- doubtedly constitutes a " hard case," which could, it would seem, be easily met by the imposition of a duty equal to the bounty. The national exchequer would then receive the grant made by foreign governments to the injury of a class of home producers. This claim of the particular producers, though apparently fair, has yet we believe no real justification. It cannot be said that any body of producers has a vested interest in its business, such as would entitle them to protec- tion against competition. Production exists for the sake of consumption ; a duty that countervailed the bounties of other governments is in principle as bad as one that excludes the bounty of nature. If foreign states choose to pay for the export of sugar or other articles, the recipients have no reason to complain. It is, moreover, important to note that the bounties said to have depressed sugar-growers and refiners have aided other producers. People are tired of hearing of the distillers, brewers, biscuit and jam manu- facturers, who gain cheap material by bounties. There is, in fact, a decided balance of advantage for England in the continuance of the bounty-system, though the sugar- producing parts of the empire suffer. One argument often urged in favour of retaliation against the bounty-system is that which pictures the terrible results of foreign bounties on all industries. What, it is asked, would be the fate of the cotton, woollen, linen, and iron manufactures if bounties were to be used in their case? The rather easily detected fallacy in this argument is the assumption of the possibility of such a case. The cost of the bounties would exhaust the revenues of the countries giving them, while the cheapness to the English consumer, and RECIPROCITY AND RETALIATION. 201 the increased power of consumption thereby obtained, would more than balance the temporary loss and disturb- ance. Judged by the test of facts, there is no reason advocate retaHation as a remedy for the supposed evils bounties. to\ of \ CHAPTER XVII. COMMERCIAL FEDERATION. — CONCLUSION. One very noticeable effect of recent developments of commercial policy has been the increased importance of measures for trade federations, or fiscal unions. As in- stances we have plans for unrestricted commerce between the United States and Canada ; for Australian federation ; and on a larger scale for the formation of a Customs Union of the British Empire, or even for a Pan-American or Central European League. These various proposals differ widely in reasonableness and practicability, but they are all, at least in part, prompted by the desire to escape from the cramping limitations of the protectionist system. ( So long as high duties merely check foreign imports their upholders do not complain ; but when their further inevitable effect in reducing exports comes into view, there is a general feeHng that some remedy should be tried, and the readiest one seems to be the opening of new markets by the agency of special agreements, or by union. \ ■^ The direct connexion of this desire for commercial unions with the prevalence of protection becomes evident when we consider that if free-trade were generally adopted COMMERCIAL FEDERATION— CONCLUSION. 203 there would be no need for any such expedients. Where home and foreign products are treated on exactly the same terms no further benefit can result from trade federation. It may be of service in introducing freedom, but once that object has been gained its advantage ceases. Free-trade means nothing but the removal of all artificial discourage- ments to foreign trade, and the best-devised agreement can do nothing more. Moreover, the universal adoption of a free-trade policy would reduce to a minimum the economic effects of national distinctions. The ideal of Cobden and his followers was that of a group of nations freely exchanging their products and settling their disputes by arbitration. Under such a system national and economic boundaries would soon cease to coincide. Just as at present industrial areas are not the same as local political divisions, so would the economic units soon differ from the national ones in a world where free- trade was definitely established. The sanguine hopes of the free-traders were, as we know, very imperfectly realized. For a short time there was a strong movement in the direction of commercial freedom l but the continental reaction (chap, ix.), and the growth of protectionist feeling in nearly all new countries, have proved that restrictions to trade are certain to endure for a consider- able time. This change in the prospects of the immediate future has made the employment of palliatives for the evils of protection seem desirable in the absence of a radical cure. How deeply the conceptions of the Manchester school influenced English policy and sentiment is best seen in the treatment of the colonies (pp. 107-8). The careless way in which all control over the trade relations of these rapidly- 204 COMMERCE OF NATIONS. growing communities was surrendered by the Imperial Government is a characteristic illustration of the disposition of statesmen a quarter of a century ago. That the colonies were sure to fall off like ripe fruit from the tree was the generally accepted view, and that they, in common with all other countries, were to be free-trading in policy, was also regarded as certain. The dominant sentiment of the present day is curiously in contrast with this complacent belief. English producers have found that they are met in many countries by high duties, and have besides to encounter the keen competition of energetic rivals. British commercial supremacy is thought to be seriously threatened, and thus the very arguments that were once used in favour of the removal of protection are now employed in support of some form of federation. ^ It is argued that the British Empire possesses nearly every important product within its territory, and that real free-trade over its nine million square miles would be of more practical advantage than the existing English system, accompanied by hostile tariffs in other countries. ^ If imports and exports tend to balance, then the refusal of the latter must lead to the stoppage of the former. When America, France, Germany, and Russia will take nothing from us, we can in turn get nothing from them. Consequently it would seem that a Customs League with the colonies, even if accompanied by protection against the outside world, would on recognized economic principles be advisable. To the case as so put, we must say in Adam Smith's phrase, that it is " a matter of deliberation. '^ The gain of a large market will more than compensate for the closing of a small one ; and if we have to choose between the colonial and foreign trades, that choice should be based on a careful esti- COMMERCIAL FEDERATION— CONCLUSION. 205 mate of their comparative magnitude present and future. But when we allow that under the supposed conditions there is room for deliberation, it does not follow that the policy of preferring colonial trade should be accepted without deliberation. It rests with those who advocate the course to show conclusive grounds for its adoption. These, it may be said, are as yet wholly wanting, while on the other side there are certain plain general facts and consideration? ihat point to the inexpediency of such a system First, as regards the question of comparative amount, we find that in 1875 the British exports to foreign countries were 68°/^, those to British possessions 327^ of the total; in 1896 the respective proportions were 69°/^ and 3i7o — ^•^' the exports to foreign countries had risen from ;^i 5 2,000,000 to ;^2o5,ooo,ooo ; those to British possessions from ;j^7 1,000,000 to nearly ;^9 1,000,000. These figures show that foreign trade is by far the more important, nor do they lead us to expect a rapid growth in colonial trade. Besides, the increased amount of exports to the colonies is largely due to the growth of commerce with India, To discourage two-thirds of our trade for the sake of stimulat- ing the other third can hardly be prudent. A second consideration is as important. All proposals for encouraging colonial trade involve the abandonment of the present policy of the United Kingdom. We have seen (chap, vi.) the cautious and tentative way in which it was established, and how well suited it was to the economic condition of the country. More particularly is the rule of the free entry for food and raw materials an essential element in the success of British manufactures. But it is precisely this part of the system that would require modifica- tion. Speaking broadly, the colonies export raw materials 2o6 COMMERCE OF NATIONS. and food, and import manufactures ; therefore the only- effective privilege to them would be the imposition of duties on such foreign products as corn, wool, timber, and meat. It can hardly be doubted that any duties on these commo- dities would raise the cost of production in England, and at the same time hamper our trade with the United States and South America, which in exports alone came in 1889 to ;^6o,ooo,ooo. Any departure on the part of England from the free-trade policy would be too dangerous a step to be even temporarily tried. Another circumstance to be taken into account, is the great diversity in economic conditions of the lands compre- hensively known as ** the Colonies.'' There is no real harmony of interests, so far as special trade regulations are concerned, between them. Australia, Canada, India, and the sugar colonies would be differently affected by each particular privilege. Small concessions in the shape of moder- ate differential duties would be almost inappreciable in their effect. It is often suggested that small protective duties would not raise prices ; but if so they would offer no inducement to colonial producers, who at present have a free market in Great Britain for all their commodities. To give some benefit to each colonial possession, the total amount of duties would have to be so high as to be seriously restrictive of trade. A duty of 55. per quarter on wheat would not suffice to turn the current of trade from Russia and the United States to Canada and Australia. Besides, and this is an additional objection, the system of differential duties in favour of colonial products is but a return to the old colonial policy. Sugar and timber were the principal articles then encouraged ; it is probable that com, meat, and wool would now be inclj^ed in the list. The results of these favours to the colonial COMMERCIAL FEDERATION— CONCLUSION. 207 interests were not so satisfactory as to encourage a repetition of them. So far as the protective tariffs of foreign countries impede British trade, they give colonial products an advantage that can only be lost by the imposition of equally high duties by the colonies. On the supposition that foreign protectionism will seriously curtail British trade, it follows that it will in the same measure encourage it with communities that do not levy high duties. The growth of Indian trade (p. 113) shows the stimulating effect of complete liberty. There is no reason to doubt that the same result would follow a like policy elsewhere. From these considerations it follows that a reform of the fiscal systems of the Empire must begin out- side Great Britain. It is quite open to all or any of the self-governing colonies to obtain perfect free-trade with the United Kingdom by simply readjusting their own tariffs, and it is here that the real difficulty of the question lies. The need of revenue in new countries can be most conveniently met by indirect taxation, particularly by import duties. The customs of both Canada and the Australasian colonies are by far the largest part of their tax revenues (speaking broadly, about three-fourths of the whole). It cannot be expecrfeed that this branch of revenue will be speedily reduced, or that corre- sponding excise duties will be imposed on native producers. Tariff reform often causes immediate loss of revenue, and the protected interests are too powerful to allow of any rapid change. The most hopeful field for reform lies in the direction of what are called the Crown colonies. The intricate nature of their fiscal systems (p. 113) affords an opportunity for relieving trade of a good many minor obstructions, and it is possible that the use of a reasonable tariff by one large class of dependencies would be the first step towards the correction 2o8 COMMERCE OF NATIONS. of anomalies in other cases. Accidental differences of duty- might be removed, and some general principles laid down as to the commodities to be charged, but simplicity and a protective policy are hardly reconcilable. The aims of securing revenue and encouraging native industries cannot be combined in a simple and convenient system. One way in which greater uniformity may be reached is through local confederations. The Dominion of Canada, whatever be its errors in commercial policy, has at least internal free-trade and a single though complicated tariff. Australian federation would perform the same service for that part of the world ; and, if the reform of the smaller colonial tariffs were also carried out, the fiscal systems of the Empire would be reduced to a few leading types, and there would be greater opportunity for smoothing down the remaining differences. It may be that Earl Grey was right when he declared that "it is from the nature of things impossible that the Colonies should be under the same fiscal system as ourselves *' ; but it would be well to make the points of agreement as many, and those of difference as few, as possible. Beyond this modest but important reform, there is, we are forced to believe, nothing that can be advan- tageously done in the direction of commercial union. A similar tendency, though very different in its political aspect, is shown in the plans for reciprocity between the United States and Canada, as also between the first- mentioned country and the West Indian Islands. If com- mercial union be such an advantage as it is often asserted to be, its benefits will be quite as noticeable in these parti- cular cases. Looked at from the purely economic and com- mercial standpoint, the problem for the Canadians to solve is, whether the gain of free-trade with the neighbouring COMMERCIAL FEDERATION— CONCLUSION. 209 Union would be more than the loss on other trade from the greater severity of the American tariff. As a producer of raw materials, Canada would seem to have a stronger interest in the European market ; but on the other hand, the proximity of the States and their growing population offer greater prospects for the future. The decision of the question is by no means easy, and is of course complicated by the political element. For the British West Indies the value of the great market of the United States for their sugar appears to outweigh the loss that submission to the American scale of duties would inflict. A wise reform of their existing tariffs would however be likely to secure them this advantage without any sacrifice. Looked at generally, commercial union is a mode of remedying the inconveniences of protection, or even of cus- toms boundaries. The German Zollverein was a remarkable example of the benefits that a federation of the kind may produce, and it is highly probable that larger commercial aggregates will be established in the future. As it is, very many of the smaller units have disappeared, and the tendencies are all in favour of further amalgamations. Plans for a league of Central Europe seem just now chimerical, but the commercial treaties of 1860-70 would have appeared just as unlikely a few years before their negociation. An examination of the history of commercial policy and of the theories that direct it, naturally suggests a question as to the future course of legislation in respect to foreign trade, and the permanence of existing beliefs. Were we to confine our attention to the last twenty years, it would be hardly possible to escape the impression that protection was likely to be the system of the immediate future, and that fresh develop- ments of it might be expected. A directly opposite opinion 2TO COMMERCE OF NATIONS. was formed by those who studied the progress of free-trade up to 1865. ^^t 2, quarter of a century is too short a time to take if we want to see the true line of movement. In the commercial policy of Europe since the flourishing period of mercantilism, there is a large amount of progress evident. Protection, as it exists even in Russia and the United States, is but a feeble imitation of the EngHsh legislation of the eighteenth century. Improvement may be slow, and there have been and will be periods of reaction ; but we can hardly doubt that when the transitory conditions that have produced the economic revolution of the last twenty years (pp. 92-4) have passed away, there will be a fresh effort to gain com- mercial liberty. The mode may be by consolidation of the existing countries into larger groups, followed by treaties between these bodies, or it may be simply by internal reforms in each country ; but whatever it be, there is no likelihood that nations will permanently endure the loss that restriction inflicts on them. Even at present we can see certain agencies that may lead to the overthrow of the protective system. One is the evident impatience with which the socialist and other labour parties regard indirect taxation. Once the system of raising revenue by taxing commodities is seriously assailed the whole protectionist policy must be abandoned. The hope of getting revenue under the guise of aiding in- dustry explains much of the predilection of statesmen for high duties. Another very powerful force in favour of freedom is the increasing mass of foreign trade. In spite of duties, the growth of exchange between nations is very rapid. On its continuance and expansion many powerful interests depend for their prosperity. What happened in England in the case of the " Anti-Corn Law League " will occur in other countries when the circumstances favour. The exporters' COMMERCIAL FEDERATION— CONCLUSION. 211 and consumers' interests only need organization to make themselves felt. These forces will, moreover, have the support of educated opinion. \ Whatever be the difficulties of particular phases of the tariff question (and we have not sought to disguise them), the balance of argument is on the whole irresistibly on the side of free-trade. The fuller and more protracted the discussion of the question is, the more will it be plain that there is no justification for a policy that tends to separate nations by maintaining a permanent protective system. The advantages of free commerce may not be all that its earlier advocates imagined, but they can be shown to be real, and well worth obtaining. To conclude, then, though we cannot expect any speedy abandonment of the protective system^ which will doubtless continue for a long time, we may look for breaches in it, and at intervals steady and sustained reforms, leading finally, though by slow degrees, to the adoption of com- plete free-trade. INDEX. Agriculture, depression of, 93, 99, 140; protection to, 54, 78, 100, 121, 128-9 ; see Com Laws Anti-Corn Law League, 61, 62, 210 Argentine Republic, bounty in, 174 ; paper-money in, 26-7 ; tariff .of, 115 Austin, John, 189 Australia, Federation of, 202 ; tariffs of, 11 1-2 Austria, commercial policy of, 88-9, lOI Balance of trade, 36, 153 Belgium, 6 ; commercial policy of, 86-7, 102 Bolles, A., quoted, 80 Bounties, 37, 90, 122, 170, 175 ; French shipping, 96, 1 72-3 ; continental sugar, 99, 173-4 ; retaliation as a remedy for, 199 — 201 Bourne, E. G., 122 Brazil, tariff of, 115 Calhoun, 72 Canada, Dominion of, 79» 206 ; commercial policy of, 109-10, 208 and Reciprocity with United States, 109, 195, 202, 208-9 • Union Act in, 107 Cancrin, Count, 89 Cape Colony, 107; tariff of, 112-3 Carey, H. C, 40, 122, 128, 141, 145, 154, 165, 203 ; his protec- tionist theory, 126-7 Cavour, 86 Ceylon, tariff of, II3 Chevalier, M. , 66^ 84 ; quoted, 47 Chili, tariff of, 116 Cobden, R., 62, 66, 84, 123, 164, 189, 203 ; quoted, 12, 58 Colbert, 35, 39, 40 Colonial policy, 106-7, 203-4 S)rstem, 38; overthrow of, 45 - tariffs, 109 — 115 Colombia, tariff of, 116 Colonies, the, economic conditions of, 206 ; federation with, 202 — 208 Crown, tariff of, 113; fiscal reform in, 207-8 Commerce, foreign benefits of, 15 — 17, 190 ; division of bene- fits in, 23-4; growth of, 2-3, 104 ; possible evils of, 18 — 21 ; primitive, 7-8, 16 international, what is ? 5 Commercial policy, see under sepa^ rate countries treaties, see Treaties Comparative cost, law of, lO — 12, 21 Continental system, 51, 71 tariffs, see Tariffs, also the different countries Corn Laws — Belgian, 86 ; Dutch, 86; English, 51, 55, 88, 160, 165 ; attacks on, 58 ; repeal of, 61, 68 ; French, 83, 97 ; repeal of, 85 ; German, 97 Cost of production, 9-10 Custom House regulations, 175-6 214 INDEX. Differential duties, 55, 60, 61 ; reduction of, 61 ; repeal of, 64 ; in Belgium, 86 ; surrender of, 89 ; revival of, in France, 97 Dilke, Sir C, quoted, 136 Diversity of employment, whether promoted by protection, 138 — 40, 165 Division of labour, 16-17; draw- backs of, 18-19 international, see Com- EconomisteSf referred to, 40, 42, 126 Eden, see Treaties Employment, whether increased by protection, 148-9 England, see Great Britain Exports, excess of, 32, 36 ; see Imports Export duties, 37, 170, 199 ; colonial, 113; on wool, 58; Zollverein, 87 ; abolished, 99 Factory laws, as a reason for pro- tection, 165, 168 Fair-trade, 27, 102, 197 ; see Reciprocity Figuerola, 87 Foreign loans, 29-30 trade, see Commerce France, bounties in, 96, 172-3 ; commercial policy of, 83-6, 94-7 ; com laws in, 83, 85, 97 ; English trade with, 36, 45, 47, 65-6; tariff of 1 79 1, 47; see also Protection and Treaties Free-trade, accepted in England, 63, 66 f 187 ; defects of popular arguments for, 130-2; '* one- sided," 187 ; origin of, doctrine, 42-4; probable future of, 210-11 ; tendency towards, in Europe in 1850—1865, 88-9; in United States in 1846, 73-4 ; see Pro- tection Free-traders, 55, 60, 92, 130 ; failure of their predictions, 92, 189-90 Freights, influence of, 31, 183 Germany, commercial policy of, 87-8, 97-9 ; Customs Union of, see Zollverein ; protectionist doctrines in, 127 ; bounties in, 172-3 ; reduction of sugar bounties in, 174 Giffen, R., 192 Gladstone, W. E., fiscal reforms of, 53, 63'; on reciprocity, 196; quoted, 63, 64, 69 Great Britain, commercial policy of (history), 51 — 67; (principles), 68-9 ; foreign trade of, in 1890, 3 ; growth of trade with France (1786-9), 47 ; with India (1875 — 1890), 113; with foreign countries and British possessions (1875— 1887), 205 ; tariff of 1820, 53-5; of 1840, 59; of i860, 65 Greece, export duty on currants in, removed, 196 Grey, Earl, quoted, 208 Hamilton, Alexander, 126, 128, 133 ; his Report on Manu- factures, 70 ; summary of, 120-2 Holland, 6 ; commercial policy of, 86, 102 ; fair trade party in, 197 Home market, 121, 125, 145-6 trade, more extensive than foreign, 4, 152-3 Hume, quoted, 45 Hungary, 1 01 Huskisson, fiscal reforms of, 53, 55, 57,63 ; measures as to French trade, 65 ; reciprocity Naviga- tion Acts of, 62, 72 Immigration, whether encouraged by protection, 141 -2 Imports, excess of, 27, 192 ; its causes, 27 — 31 ; gain of trade consists in, 190 INDEX. Infant industries, 71; protection to, 121 ; discussed, 133-7 India, 5, 26 ; trade of, with Eng- land, 113, 205, 207 Italy, commercial policy of, 86, 99-100; customs regulations in, 176 ; tariff war with France, 100, 196 Jamaica, tariff of, 115 Laissez faire, 18, 44 List, F., 88, 122, 127, 128, 133, 143 ; criticisms of Adam Smith, 125-6 ; his system of protection, 123-5 McKinley Tariff Act, 77-9, 141, 174, 196 Manchester school, 203 Mercantile system, 33 — ^41, 175 ; criticisms of, 40-1 ; methods of, 35-9 ; origin of, 33-4 ; overthrow of, 42-5 ; peculiarity of later, 34 ; relation of, to protection, 40, 48-9, 119 ; variations in, 39 Methuen, see Treaties Mexico, tariff of, 115 Mill, J. S., 121, 128, 133, 161 ; quoted, 132, 193 Money, in foreign trade, 24-7 ; distribution of, and protection, 153-4 " Most-favoured Nation " clause, 85, 96, 100-102 Napoleon I., 51, 71 III., 84, 94 Navigation Laws, 39 ; impolicy of, 163-4 ; repealed, 90 ; Dutch repeal of, %6 ; English, 55 ; repeal of, 62 ; reason of, l6i ; French, 95-6 Netherlands, the, see Holland Newmarch, W., 67 ; quoted, 54-5 New South Wales, commercial policy of, ni-2, 136, 142 215 New Zealand, sugar bounty in, 174; tariff of, 1 1 1-2 North, Dudley, 42 ; quoted, 15 Octroi duties, 176 Parnell, Sir H. , 60, 62 ; his Financial Reform quoted, 57-58 "Pauper labour" argument for protection, 150 Peel, Sir R., fiscal reforms of, 53, 58—63, 73 ; referred to, 78, 196-7 Peru, tariff of, 1 16 Pitt, 47 Portugal, commercial policy of, 87, 102 ; customs regulations of, 176 ; English treaty with, 38 Productive power, whether deve- loped by protection, 137-8 Protection, economic arguments for, 133 — 155 ; criticism of, 155-6 ; political, 159—165 ; social, 165-7 cost of, 178-80 ; future of, 209-11 ; practical operation of, 177—186 - theory of *' solid," 128-9 Protectionism, American, 129 ; colonial, ib. ; continental, 128 ; characteristics of, 130-1 ; mer- cantile system and, 39, 40, 48, 119 ; nationality and, 48, 118, 130, 159 ; war and, 49, 71, 76, 82, 93 Protectionist reaction, causes of, 92-4 ; modern, theory, 117 — 132 Protectionists, 18, 132 Queensland, tariff of, 1 1 1-2 Quesnay, quoted, 40, 42 Reciprocity, 188 — 193, 196-7 ; treaties, 62, 71 Rent, effects of protection on, 147 Retaliation, 193 — 201 ; objections to, 195, 197 Roscher, W., 41 ; quoted, 141 2l6 INDEX. Rouher, M., 84 Russia, commercial policy of, 89, 101-2 ; political argument for protection in, 160 Say, J. B., 133 Smith, Adam, 52, 118, 119, 125, 130 ; approved of Navigation Laws, 62, 161 ; on mercantile system, 40, 43, 44, 45 ; quoted, 157, 186, 204 ; on retaliation, 194 Socialists, 18, 210 Soil exhaustion, protection as a remedy for, 146-7 South Australia, tariffs of, 111-2 Spain, colonial system of, 106 ; commercial policy of, 87, 102 ; differential duties on British imports removed, 102, 196 Steuart, Sir James, 22 Sugar, bounties on, 173-4; differ- ential duties on, 54; lowered, 60 ; repealed, 64 Sumner, W. G., quoted, 120 Sweden and Norway, protection in, 103 Switzerland, commercial policy of, 87, 102; effect of foreign pro- tection on, 142 Tariffs, colonial, 109— 113 ; conti- nental, reform of, 83-89 ; general principles governing, '89 ; " con- ventional," 85, 96 ; recent tariflf changes, 94 — 103 ; Spanish- American, 115 — 16; United States, 71 — 80 ; see McKinley Act, Walker, also under separate countries Tasmania, tariffs of, 111-12 Taussig, F. W., 136 Taxation, as a reason for protection, 154 ; incidence of, 132, 144 Thiers, M., 94-5 Timber duties, 53 ; reduced, 61 ; repealed, 65 Tooke, T., 55 Treaties, commercial, Anglo- French, of 1786 (" Eden "), 45- 7 ; results of, 47; of i860 (" Cob- den"), 65-6, 84-5 ; results of, 86 ; French (1860-7), 90;(i88i-3)96 ; denunciation of, 95, 97 ; German, 88, 96, 99; Italian, 99, 100 ; Methuen (1703), 38; United States, 45 Uruguay, tariff of, 116 United Kingdom, see Great Britain United States, commercial policy of, 70 — 81 ; affected by civil war, 75 ; principles of, 79-80 ; tariff of 1816, 71 ; of 1824, 72 ; of 1828, ib.'yoi 1832, ib.\ of 1842, 73 ; of 1861, 75 ; of 1883, 76 ; Com- promise, 73 ; McKinley, 77-9 ; Walker 73 Venezuela, tariff of, 116 Villiers, C. P., 58, 189 Wages, effect of protection on, 151 Walker tariff, 73, 115 War, effect of, 48, 71, 92 ; a cause of protectionism, 49, 165 ; danger of, an argument for protection, 159-160 Wells, D. A., 115, 197 West Indies, differential duties in favour of, 55 ; removed, 61 ; effect of emancipation in, 107 ; reciprocity with United States, 208-9 Western Australia, tariffs of, 1 1 1-12 World market, 13-14 Zollverein, German, 69, 87, 90, 209 ; proposed, of British Em- pire, 161, 202 sq. ^1 1 lll^.^p UNIVERSITY OF CALIFORNIA LIBRARY This book is DUE on the last date stamped beloTs *OoV^'^'^* LD 21-100m-12,'46(A2012sl6)4120 JUF r'1954 YB 06073 m f 117^ J^ OFCAI r-',^ ^