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Subject Area: Economics
Topic: Free Trade

ESSAY No. LVII. - Condy Raguet, The Principles of Free Trade [1835]

Edition used:

The Principles of Free Trade illustrated in a series of short and familiar Essays originally published in the Banner of the Constitution, 2nd ed. (Philadelphia, 1840).

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Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


ESSAY No. LVII.

september 8, 1830.

The settled policy doctrine in continuation. Estimate of the value of capital vested in the protected manufactures. It would be better for the country that this capital should be sunk, than that the protective policy should be adhered to. Probable maximum of loss on this capital, if all duties were abolished.

IN continuation of the remarks contained in Essay No. 53, we shall now proceed to examine the doctrine relied upon by many of our most conspicuous politicians, as justificatory of their support of the tariff system, namely, that after millions of dollars have been invested in manufactures, to withdraw the protection now afforded to them, would be unwise, and impolitic, considered even as a pure question of political economy.

In this position, there is no doubt a plausibility, which at first sight may be apt to allure; but we flatter ourselves that we shall be able to present such an analysis of it as will completely show, that those who have taken refuge in it, from the scorching rays of truth, have taken refuge in a fallacy. The proposition, in a simple form, is this: “In the United States, there is a capital invested in the cotton and woollen manufactures of, say, fifty millions of dollars. These manufactures are sustained by protecting duties, varying, upon cottons, from 25 to 175 per cent., and upon woollens from 45 to 255 per cent., averaging more than 100 per cent., but which we will suppose, for the sake of argument, to be only 50 per cent. beyond such duty as would be called for, for purposes of revenue, which is a very low estimate. It is for the interest of the nation, considered as one family,” says the theory, “that the consumers of cotton and woollen fabrics should continue to pay an increased price of fifty per cent. for those articles, rather than that the capital invested should be left to take its chance, under a moderate revenue duty.”

A moment’s reflection will convince any one, that the truth or fallacy of this position depends entirely upon the proportion which the annual tax bears to the annual value of the capital invested. The annual value of the capital of fifty millions of dollars, at six per cent. per annum, is three millions of dollars; at ten per cent. five millions. For a perpetual annual income of five millions of dollars, well secured, the owners of the manufacturing capital referred to, would very readily consent to its complete annihilation, either by burning it, or sinking it in the ocean, and that sum may therefore be considered as the maximum of its value to the individuals who own it, and, consequently, to the nation. No capital, in the present state of wealth, can, in this country, be estimated as producing more than ten per cent. per annum, whether employed in agriculture, commerce, or manufactures, and hence that sum may be fairly assumed as the full value to the nation. Now, if the annual tax imposed upon the industry of the country, for the purpose of enabling the proprietors of the manufacturing capital to procure five millions of dollars out of it per annum, can be shown to exceed five millions of dollars, it will be very evident, that it would be better for the nation that the whole capital should be sunk, rather than that the tariff system should be persevered in. That there may be no doubt of this position, we will illustrate this by a familiar case or two.

A new road is constructed, to enable the farmers of a particular neighbourhood to convey their produce to market more cheaply than by the old road, at an expense of one hundred dollars to each. The profit which these farmers could have derived from employing their money in some other way, we will suppose to be ten per cent. per annum, and consequently the original expenditure of the capital involved a perpetual tax upon the industry of each of the farmers of ten dollars a year. Their motive for making this expenditure, was to diminish, as we have said, the expenses of transportation, and the road certainly would not have been constructed, had it not been clear to them, that the diminution would have been greater per annum, than the amount, of ten dollars. This amount, we will suppose, to have been fifteen or twenty dollars, that is to say, each farmer, by sinking a capital of one hundred dollars, equal to ten dollars per annum, has enabled himself to save fifteen or twenty dollars per annum, by the reduction in transportation.

Now, whilst this road is in full operation, a plan is started for constructing a canal, which passes by the doors of these farmers, and so reduces the expenses of transportation, that, instead of saving fifteen or twenty dollars to each, it will save fifty. The theory of the vested interest men is, that it is better for the farmers to stick to the road. The theory of the free trade doctrine is, that it is better for the farmers, and the whole community, even if the former have to contribute another hundred dollars a-piece towards the canal, to abandon the road and avail themselves of the advantages held out by the canal; for, by so doing, they will put into their pockets an annual saving greater than the annual value of the two capitals invested.

Again. A weaver has a loom worth fifty dollars, by which he can weave twenty yards of cloth in a day. A new invention appears by which double the quantity can be woven. It is better, says the theory of the American System, that this weaver should stick to the old loom, than that he should purchase the new one, because otherwise he would sink the capital vested in the former.

These examples are sufficient to show, that the question is a simple one of profit and loss. If it appear that the annual expected gain or saving by the new process, will not be equal to the annual value of the capitals vested, in that case, it will be clearly beneficial to adhere to the old system. Suppose, for instance, a canal should be constructed at a cost of a million of dollars, which would, according to our estimate of the value of capital, involve an annual sacrifice of a hundred thousand dollars, or ten per cent. Suppose then a rail road were projected to run parallel to it, to cost an equal sum, and consequently to be attended by an equal annual sacrifice. Now, unless it was clear, that the annual saving to the community by the diminished rates of transportation, should be equal at least to two hundred thousand dollars, it would be bad policy to construct the rail road. And so, on the other hand, it would be good policy to construct it, if the annual saving should exceed that sum, even though the canal should be abandoned, and be suffered to become dry.

The only point, therefore, to be ascertained, in order to settle the matter under discussion is, whether the American people, as a whole, sustain a greater annual loss by the taxation imposed upon them, for the support of the cotton and woollen manufacture, than the annual loss they would sustain by the annihilation of a capital of fifty millions of dollars; or, in other words, is the increased price of the cotton and woollen goods consumed in the country, occasioned by the high duties, greater than five millions of dollars per annum?

We apprehend that few persons would be at a loss for an answer to this question. The population of the United States is twelve millions. If the increased price of the cotton and woollen goods occasioned by the high duties, was only equal to fifty cents per annum each, the tax would be six millions, and, according to our demonstration, it would be better for the nation, rather than continue such a tax, to see the fifty millions of capital invested in the manufacture of those articles annihilated. But fifty cents per head on the whole population, is a very small portion of the tax really imposed for the support of the cotton and woollen manufactures. We should think it much more likely to amount to two or three dollars per head; but of this, any person may judge for himself, it being sufficient for us, that, in the low estimate of fifty cents per head, we have found ample foundation for the establishment of our position.

Now it will be remarked, that, in this view of the subject, we have supposed the whole fifty millions of capital to be annihilated. But could such annihilation take place under any reduction of duties, even under an abolition of the whole? Clearly not, for,

First. Of this fifty millions of dollars, probably three-fourths, at this moment, of what is left, consists of goods on hand, raw materials, bills receiveable, book debts, and cash, none of which would be entirely lost, under such a gradual reduction of the duties as would be readily acceded to by the friends of free trade, if the reduction were to be certain and ample.

Secondly. The remaining one-fourth, consisting of buildings and machinery, would in part be applicable to some other purposes, and would not therefore lose all its value; and

Thirdly. From the very nature of things, a part of the cotton and woollen manufacture now carried on in this country, would be carried on if the duties were reduced to 15 per cent., at which they were before the protecting system began, as they were when the duties were but 5 per cent., and as they would be if there were no duties at all.

The clamour therefore raised against a reduction of the duties as destructive of fifty millions of capital, is a false hue and cry. We do not believe the loss would be ten. We do not, however mean by this to say, that those who made up the original capitals of fifty millions would get back forty. A part of the fifty has probably been sunk long ago, and has therefore been irrecoverably lost. That loss cannot be chargeable to an act hereafter to take place, and therefore, in estimating a loss to result from a reduction of duties, a loss already sustained must not be taken into the account.