XVII. Protection and Producers

CHAPTER XVII. PROTECTION A.1.~D PRODUCERS. '!'HE primary purpose of protection is to encourage producers*-that is to say, to increase the profits of capital engaged in certain branches of industry. The protective t1:eory is that the increase a protective duty causes in the price at which an imported commodity can be sold within. the country, protects the hOlne pro ducer (i.e., the man on whose account commodities are produced for sale) from foreign competition, so as to encourage him by larger profits than he could otherwise get to engage in or increase production. All the bene. ficial effects claimed for protection depend upon its effect in thus encouraging the elnploying producer, just as all the effects produced by the motion of an enginellpon the complicated machinery of a factory are dependent upon its effect in turning the main driving-wheel. The main driving-wheel (so to speak) of the protective theory is that protection inereases the profits of the protected producer.

But when, assuming this, the opponents of protection represent the whole class of protected producers as grow'* For want of a better term I have here used the word "pro ducers" in that limited sense in which it. is applied to those who control capital and employ labor engaged in production. The industries protected by our tariff are (with perhaps some nominal exceptions) of the kind carried Oil in this way. 166 PROTEGTION AND PRODUCERS. 167 ing rich at the expense of their fellow-citizens, they ,are ~ontradicted by obvious facts. Business men well know that in our long-protected industries the margin of profit is as small and the chances of failure as great· as in ,any others--- if, in fact, those protected, industries are not harder to win success in by reason of the more trying fluctuations to which they are subject. The reason why protection inmost cases thus fails to encourage is not difficult to see.

The cost of any protective duty to the people at large is (1), the tax collected upon imported goods, plus the profits upon the tax, plus the expense and profits of smuggling in all its forms; plus' the expense of sometimes trying smugglers of the coarser 'sort, and occasionally sending 3, poor and friendless one to the penitentiary; plus bribes and moieties received by government officers; and (2), the additional prices that must be paid for the products of the protected home industry. It is from this second part alone that the protected industry can get its encouragement. But only a part of this part of what the people at large pay is real encour~ agement. In the first place, it is true of protective duties, as it is true of direct subsidie~, that they cannot be had for nothing. Just as the Pacific Mail Steamship Company and the various land-and bond-grant railways had to expend large sums to secure representation at Washington, and had to divide handsomely with the Washington lobby, so the cost of securing Congres sional " recognition" for an infant industry, or fighting off threatened reductions in its "encouragement," and looking after every. new. tariff bill, is a considerable item.

But still more important is the absolute loss in carrying on industries so unprofitable in themselves that they can be maintained only by subsidies. And to this loss must be added the waste that seems inseparable from govern168 PROTECTION OR FRE~ TRADE' mental fosterage, for just in proportion as industries are sheltered from competition are they slow to avail them selves of improvements in machinery and methods.* Out of the encouragement which the tariff beneficiaries receive in higher prices, much must thus be consumed, so that the net encouragement is only a small fraction of what consumers pay. Taking encouraged producers and taxed consumers together there is an enormous loss. Hence in all cases in which duties are imposed for the benefit of any particular industry the discouragement to industry in general must be greater than the encourage ment of the· particular industry. So long, however, as the one is spread over a large surface and the other over a sUlall surface, the encouragement is more marked than the discouragement, and the disadvantage imposed on all industry does not much affect the few subsidized industries.

But to introduce a tariff bill into a congress or parlia ment is like throwing a banana into a cage of monkeys. No sooner is it proposed to protect one industry than all the industries that are capable of protection begin to screech and scramble for it. They are, in fact, forced to do so, for to be left out of the encouraged ring is neces sarily to be discouraged. The result is, as we see in the if This disposition is, of course, largely augmented by the greater cost of machinery under our protective tariff, which not only increases the capital required to begin, but makes the constant discarding of old machinery and purchase of new, required to keep up with the march of invention, a much more serious ms.tter. Case8 have occurred in which British manufacturers, compelled by com petition to adopt the latest improvements, have actually sold their discarded machinery to be shipped to the United States and used by protected Americans. It was his coming p,eross a case of this kind that led David A. Wells, when he visited Europe as Special Com..

missioner of Revenue, to begin to question the usefulness of on? tariff in promoting American industry.

PROTECTION AND PRODUCERS. 169 United States, that they all get protected, some more: and some less, according to the money they can spend and the political influence they can exert. Now everY' tax that raises prices for the encouragement of one~ industry must operate to discourage all other industries; into which the products of that industry enter. Thus a; duty that raises the price of lumber necessarily. discour ages the industries which make use of lumber, from those connected with the building of houses and ships to those engaged in the making of matches and wooden tooth picks; a duty that raises the price of iron discourages the innumerable industries into which iron enters; & duty that raises the price of .salt discourages the dairy-· man and the fisherman; a duty that raises the price of' sugar discourages the fruit-preserver, the maker of .:;yrupsand cordials, and so on. Thus it is evident that \'very additional industry protected lessens the· eneour·· agement of those already protected. And since the net ~ncouragement that tariff beneficiaries can receive asa whole is very much less than the aggregate additiont() prices required to secure it, it is evident that the point at which protection will cease to give any advantage to the protected must be much short of that at which everyone' is protected. To illustrate: Say that the total number of industries is one hundred, of which one-half are capable of protection. Let us say that of what the pro tection costs, one-fourth is realized by the protected industries. Then (presuming equality), as soon as twenty five industries 0 btainprotection, the protection can be of no benefit even to them, while, of course, involving ft heavy discoura,gement to all the rest.

I use this illustration merely to show that there is a point at which protection must cease to benefit even th~ industries it strives to encourage, not that I think it .possible to give numerical. exactness to such matters.

170 PROTECTION OR FREE TRADE? But that there is such a point is certain, and· that in the United States it has been reached and passed isalsocer tain. That is to say, not only is our protective tariff a dead-weight upon industry generally, but it is a· dead weight upon the very industries it is intended to stimu late. If there are producers who permanently profit by pro tective duties, it is only because they are in some other way protected from domestic· competition, andhellce the profit which ·comes to them by reason·of the duties does not come to them as producers .but as 'monopolists. That is to say, the only cases in which protec'tion canmore .than temporarily benefit any cla.f:)s of producers are ,casesin which it cannot stimulate industry. For that neither duties nor subsidies·can give any permanent advantage in'anybusi ness open to home competition results from the tendency of profits to a common level. The risk to .which ··pro tected industries are exposed from changes in the tariff may at times keep profits in them somewhat above the ordinary rate; but this represents not advantage, but the necessity for increased insurance, and though it may constitute a tax upon consumers does not operate to extend the industry. This element of insurance elimi nated, profits in protected industries can be kept above those of unprotected industries only by some sort of monopoly which shields them from home competition as the tariff does from foreign competition. The first· effect of a protective duty is to increase profits in the protected industry. But unless that industry be in some way protected from the influx of competitors which such increased profits must attract, this influx must soon bring these profits to the general level. A monopoly, more or less· complete, which may thus enable certai:ri: producers to retain for themselves the il1creasedprofits which it is the first effect of a protective duty to give!

PROTECTION AND PRODUCERS. 171 may arise from the. possession of advantages of different kinds. It may arise, in the first place, from the possession. of some peculiar natural advantage. For instance, the only ~hrome..mines yet discovered in. the United States, belonging to a single 'family, th~t family have been much encouraged by the higher prices which the protec tive duty on chrome has enabled .them to charge home consumers. In the same way, until the discovery of new and rich copper deposits in Arizona and .Montana the owners of .the fLake Superior copper-mines were enabled to make enormous dividends by the protective duty. on copper, which, so long as home competition was impossible, shut out the only 'competition that could reduce their profits,and 'enabled them to get three or four. cents more per pound for the copper they. sold in the United States than for the copper they shipped to Europe.

Or a sindlar monopoly maybe obtained by the posses .sion of exclusive privileges given by .the patent laws. For instance, the combination based, on patents for <making steel have, since' home competition with them was thus shut out, been enabled, by the enormous duty ,on imported steel, to add most encouragingly to .their illvidends, .and the owners of,'the patented process used in making paper frolIlwood have been similarlyencour ;aged by the duty on W"oodoopulp. Or again,a similar monopoly may be secured by the concentration of a business requiring large capital and special knowledge, or by th~ ·combination. of producers in a "ring" or "pool" so as to limit home production and crush home competition. For instance, the' protec tive duty on quinine, until its abolition in 1879, resulted to the sole benefit of three houses, while a combination of ouarrv-owners-the Producers'Marble Company-have 172 PROTECTION OR FREE TRADEY succeeded in preventing any home competition in the pro. duction of marble, and are thus enabled to retain to themselves the higher profits which the protective duty on foreign marble makes possible, and largely to concen..

trate in their own hands the business of working up marble. But the higher profits thus obtained in no way encour age the extension of such industries. On the contrary, they result from. the very conditions natural or artificial which prevent the extension of these industries. They are, in fact, not the profits of capital engaged in industry, but the profits of ownership of natural opportunities, of patent rights, or. of organization or combination, and they increase the value of ownership in these opportu nities, rights and monopolistic combinations, not the returns of capital engaged in production. ~rhough they may go to individuals or companies who are producers~ they do not go to them as producers; though they may increase the income of persons who ~re capitalists, they do not go to them by virtue of their employment of capi.. tal, but by virtue of their ownership of special privileges.

Of the monopolies which thus get the benefit of profits erroneously supposed to go to producers, the most impor tant are those arising from the private ownership of land. That what goes to the landowner in no wise benefits the producer we may readily see. The two primary factors of production, without· which nothing whatever can be produced, areland and labor. To these essential factors is added, when production passes beyond primitive forms, a third factor, capltal which consists of the product of land and labor (wealth) used for the purpose of facilitating the production of more wealth. Thus to production as it goes on in civi~ lized societies the three factors are land, labor and capital, and since land IS in modern civilization made a PROTECTION AND PRODUCERS. 173 subject of private ownership, the proceeds of production are divided between the landowner, the labor-owner, and the capital-owner.

But between these factors of production there exists an essential difference. Land is the purely passive factor; labor and capital are the act.ive factors-the factors by whose application and according to whose application wealth is brought forth. Therefore, it is only that part of the produce which goes to labor and capital that constitutes the reward of producers and stimulates production. The landowner is in no senses. producer-he adds nothing whatever to the sum of pro ductive forces, and that portion of the proceeds of production which he receives for the use of natural opportunities no more re'Yards and stilllulates pro duction than does that portion of their crops /which superstitious savages might burn 'up before an ·idol·in thank-offering for the sunlight that had ripened them. There can be no labor until there is a man; there can be no capital until man has worked and saved; but land was here before man came. To the production of com modities the laborer furnishes human exertion; the capi talist furnishes the results of human exertion embodied· in forms that may be used to aid further exertion; but the landowner furnishes-what? The superficies of the earth' the latent powers of the soil? the ores beneath it' the rain? the sunshine? gravitation' the chemica.l affini.

ties? What does the landowner furnish that involves any contribution from him to the exertion required in production? The answer must be, nothing! And hence it is that what goes to the landowner out of the results of production is not the reward of producers and does not stimulate production, but is merely a toll which producers are compelled to pay to one whom our law~ permit to treat as his own what Nature furnishes.

174 PROTECTION OR FREETRADEf Now, keeping these principles in mind, let us turn to the effects of protection. Let us suppose that England were to do as the English agriculturist landlords are very anxious to have her do-go back to the protective policy and impose a high duty on grain. This would much increase the price of grain in England, and its first effect would be, while seriously injuring other industries, to give much larger profits to English farmers. This increase of profits would cause a rush into the business of farming, and the increased competition for. the use of agricultural land would raise agricultural rents, so that the result would be, when industry had readjusted itself, that though the people of England would have to pay more for grain, the profits of grain-producing would not be larger than profits in any other occupation. The only class that would derive any benefit from the increased price that the people of England would have to pay for their food would be the agricultural landowners, who are not producers at all.

Protection cannot add to the value of the land of a eountry as a whole, any more than it can stimulate industry as a whole; on the contrary, its tendency is to check the general increase of land values by checking the production of wealth; but by stimulating a particular form of industry it may increase the value of a particular kind of land. And it is in.structive to observe this, for it largely explains the motive in urging protection, and where its benefits go. For instance, the duty on lumber has not been asked for and lobbied for by the producers of lumber-that is to say, the men engaged in cutting down and sawing up trees, and who derive their profits solely from that source-nor has it added to their profits. The parties who have really lobbied and lo~olled for the imposition PROTECTION AND PRODUCERS. 175 and. maintenance of the lumber duty are the owners of timber lands, and its effect has been to increase the price of "stumpage," the royalty which the producer of lumber must pay to the owner of timber land for· the privilege of cutting down trees. A certain class of fore8tallers have made a business of getting possession of timber lands by all the various "land-grabbing" devices as soon as the progress of population promised to make them available.

Constituting a compact and therefore powerful interest (three parties in Detroit, for instance, are said to own No of the timber lands in the great timber State of Michi. gan), they. have been able to secure a duty on lumber, which, nominally imposed for the encouragement of the lumber producer, has really encoura,ged. only the timber land forestaller, who, instead of being a producer at all, is me:cely a blackmailer of production~* So it is with many other duties. The effect of the sugar duty, for instance, is to increase the value of sugar lands in Louisiana, and our treaty with the Hawaiian Islands, by which Hawaiian sugar is adrnitted free of this duty, being equivalent (since the production of Hawaiian sugar is not sufficient to supply the United States) to the payment· of a heavy bounty to Hawaiian sugar-growers, has enormously increased the value of sugar lands in the Hawaiian Islands. So with the duty on copper and eopper ore, which for a long time enabled American copper companies to keep up the price of copper in the United States while they were shipping * When, after the great fire in Chicago, a. bill was introduced in Congress permitting the importation free of duty of materials intended for use in the rebuilding of that city, the Michigan timber land barons went to Washington in a special car and indu<~ed the committee to omit lumber from the bill.

176 PROTECTION OR~REE TRADE' copper to Europe and selling it there at a considerably lower price.* The benefit of these duties went to com panies engaged in producing copper, but it went to them not as producers of copper but as owners of copper mines. If, as is largely the case in coal-and iron-mining, the work had been carried on by operators who paid a roy alty to the mine-owners, the enormOllS dividends would have gone to the mine-owners and not to the operators. Horace Greeley used to think that he conclusively dis proved the assertion that the duties on iron were enriching a few at the expense of the many, when he declared that our laws gave to no one an.y special privilege of making iron, and asked why, if the tariff gave such enormous profits to iron producers as the free traders said it did, these free traders did not go to work and make iron. So far as concerned those producers who derived no special advantage from patent rights or combinations, Mr.

Greeley was right enough-the fact that there was no special rush to get into the business proving that iron producers as producers were making on the average no more than ordinary profits. And could iron be made from air, this fact would have shown what Mr. Greeley seems to have imagined it did, though it would not have * A striking illustration of the way American industry has been encouraged by a duty which enabled the stockholders in a couple of copper-mines to pay dividends of over a. hundred per cent. is afforded by the following case: Some years ago a Dutch ship arrived at Boston having in her hold a quantity of copper with which het master proposed to have her resheathed in Boston. But learning that in this "land of liberty" he would not be permitted to take the copper from the inside of his ship and employ American mechanics to nail it on the outside, without paying a duty of forty,..:fi.ve per cent. on the new copper put on, as well as a duty of four cents per pound on the old copper taken off, he found it cheaper to sail in ballast to B:alifax, get his ship re-coppered by Canadian workmen, and then come back to Boston for his return cargo.

PROTECTION AND PRODUCERS. 177 shown that the nation was not losing greatly by the duty. But iron cannot be made from air; ~t can only be made from iron ore. .And though Nature, especially in the United States, has provided abundant supplies 'of iron ore,. she. has not distributed them .equally, but has stored them in large deposits in particular places. If inclined to take Horace Greeley's advice to go and make iron,; should I think its price too high, I must obtain access to one of these deposits, and that a deposit suffi. ciently near to other materials and to centers of popula tion .. I may find plenty of such deposits which no one is using, but where can I find such a deposit that is free to be used by me? The laws of my country do not forbid me from mak ing iron, but they do allow individuals to forbid me from making use of the natural material from which alone iron can be made-they do allow individuals to take possession of these deposits of ore which Nature has provided for the m~king' of iron, and to treat and hold them as though they were their own private property, placed there by themselves and not by. God. Conse quently· these deposits of iron ore are appropriated as soon as there is any prospect that anyone will want to use them, and when I find one that will suit my purpose I find that it is in the. possession of some owner who will not let me use it until I pay him down in a purchase price, or agree to pay him in a royalty of so much per ton, nearly, if not quite, all I can make above the ordinary return' to capital in producing iron. Thus, while the duty which raises the price of iron may not benefit producers, it does benefit the dogs in the manger whom our laws permit to claim as their own the stores which eons before man appeared were accumulated by Nature for the use. of the millions who would one day be called into. qeing-enabling the monopolists of our iron land to 17~ PROTECTION OR FREE TRADEf levy heavy taxes on their fellow-citizens long before they could otherwise have done so.* So with the duty on coaL It adds nothing to the profits of the coal operator who buys the right to take coal out of the earth, but. it does enable a ring of coal-land- and· railway-owners to levy in many places an additional blackmail upon the use of Nature's bounty.

The motive and effect of many of our duties are well illustrated by the import duty we levy on borax and boracic acid. We had no duties on borax and boracic acid (which have important uses in many branches of manufacture) until it was discovered that in the State of Nevada Nature· had provided a deposit of nearly pure borax for the use of the people of this continent. This free gift of the ...i\.lmighty having been reduced to private ownership, in accordance with the laws of the United States for such cases made and provided, the enterpris ing forestallers at once applied to Congress for (and of course secured) the imposition of a duty which would * The royalty paid by iron-miners for the priVilege of taking the ore out of the earth in many cases equals" and in some cases exceeds the cost of mining it. The royalties of the Pratt Iron and Coal Company of Alabama are said to run as high as $10,000 per acre.

In the Chicago .Inter-Ocean, a stanch protectionist paper, of Octo .. ber 11, 1885, I find a description of the Colby Iron-Mine at Bessemer, Mich. This mine, it is said, is owned by parties who got it for $1. 25 per acre. They lease the privilege of taking out ore on a royalty of 40 cents per ton to the Colbys, who sub-lease it to Morse & Co. for 52! cents per ton royalty, who have a contract with Cap tain Sellwood· to put the ore on the cars for 87t cents per ton. Sell· wood sub-lets this contract for 12t cents per ton, and the sub-con·· tractors are said to make a profit of 21' cents per ton, as the work is done by a steam-shovel. Deducting transportation, etc., the ore brings $2.80 per ton~ as mined, of which only 12t cents goes to the firm who do the actual work of production. The output is 1200 tons per day, which, according to the Inter-Ocean correspondent, gives to the owners a net profit of $480 per da,y; to the Colby-s, $t50 per day; Morse & Co., $1680; Captain .Sellwood, $900 per day; and PROTECTION AND PRODUCERS. 17S make borax artificially dear and increase' the profits of this monopoly of a natural advantage.

While our manufacturers and other producers have been caught readily enough with the delusive promise that protection would increase their profits, and have used their influence to institute and maintain protective duties, I am inclined to think that the most efficient interest on the side of protection in the Unit.ed States has been that of those who have possessed themselves of lands or other natural advantages which they hoped pro tection would make more valuable. For it has been not merely the owners of coal, iron, 'timber, sugar,. orange, or' wine lands, of salt-springs, borax lakes, or copper deposits, who have seen in the shutting out of foreign competition a quicker demand and higher value for their lands, but the· same feeling has ljad its influence upon the holders of city and village real estate, who, realizing that the establishment of factories or the work ing of mines in their vicinity would give value to their the sub-contractors who do the work of mining, $30 per day, tI a total net profit from the mine, over and above what profit there may bf/ in the labor, of $3240 per day." The account concludes by saYing: H As the product will be. at least doubled during the coming year, you see there will be some fortunes made out of the Colby mine."

To these fortunes our protective duty on foreign ore undoubtedly contributes, but how much does it in this case encourage production" In Lebanon County, Pennsylvania, is a hill of magnetic iron ore \ nearly pure, which has merely to be quarried ·out. It is owned by the Coleman heirs, and has made them So enormously wealthy that these are said by some to. be the richest people in the United States. They are producers of iron, smelting their own ore, as well as rail way-owners and farmers, owning and cultivating by superintendents great tracts of valuable land. They, doubtless, have been much encouraged by the duty on iron which we have maintained for tithe protection of American labor," but this encouragement comes to -4;hem a~ owners of this rich gift of Nature to-Mr. Coleman's heirs. The deposit of iron ore would be worked were there no duty, ~d Was worked. I believe. before any duty on iron was imposed.

180 PROTECTION OR FREE TRADEt lots, have been disposed to support a policy which han for its avowed object the transfer of such industries from other countries to our own. To repeat: It is only at first that a protectIve duty can stimulate an industry. When the forces of produc tion have had time to readjust. themselves, profits in the protected industry, unless kept up by obstacles which prevent further extension of the industry, must sink to the ordinary level, and the duty losing its power of further stimlllation ceases to yield any advantage to producers unprotected against home competition. This is the situation of the greater part of " protected l" American producers. They feel the general·· injury ot the system without really participating in its special benefits. How, then, it may be asked, is it that even these pro ducers who are not sheltered by any home protection arE in general so strongly in favor of a protective tariff\ The true reason is to be found in the causes I will here ..

after speak of, which predispose the common mind to an acceptance of protective ideas. And, while keen enough as to their individual interests, these producers are as blind to social interests as any other class. They have so long heard and been accustomed to repeat, that free trade would ruin American industry, that it never occurs to them to doubt it; and the effect of duties upon so many other products being to enhance the cost of their own productions, they see, without apprehending the cause, that were it not for the particular duty that pro. tects them they could be undersold by foreign products, and so they cling to the system. Protection is necessary to them in many cases, because of the protection of·other industries. But were the whole system abolished there can be no doubt that American industry would sprir..g forward with new vigor.