🔋Tariffs Of Abominations

A long and bloody history of tariffs in the United States.

Jan 01, 2025

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A major mistake people make in life in their careers and investing is falling victim to recency bias. Last week I discussed tariffs from Trump and Biden’s perspective. We don’t have enough time to judge the efficacy of either since they just were (or haven’t yet) been implemented. To avoid useless political dialogue without any backing, let’s look at how tariffs fared in the US throughout history to compare and contrast today’s conditions to understand the topic better.

Tariffs have been a contentious political topic since the first European settlers arrived in the North American continent. From the start of the United States in 1776, tariffs played a key role in the relationship with Britain, the Civil War, the Great Depression, WWII, and globalization. If tariffs haven’t seemed significant until now, you would be right. The last major tariff issues took place in the 1930s and ever since the globalization trend has come with the lowering of tariff rates in the US.

As a percent of durable imports, globalization since the end of WWII has coincided with decreasing tariffs across the economy. Since then, total tariff rates have been mostly insignificant to geopolitics and funding the government. The figure below shows the average tariff rates since 1820 with some major policies denoted.

File:Average Tariff Rates in USA (1821-2016).png - Wikipedia

I’d argue the most important tariff policy took place in one of the worst years in US history. In 1913, the ability of the federal government to tax income became the 16th amendment of the Constitution and quickly became the primary funding mechanism for the US government. Before this, tariffs were the primary funding mechanism and consisted of upwards of 95% of federal income. The other issue I have with 1913 is that the Federal Reserve Bank of the United States was created yielding the central government the ability to manipulate interest rates and money supply. This I argue is the root cause of many societal ills of today [1,2].

As you can see below, tariffs are a tiny portion of government revenue and have been since the inflection in 1913. The ability to tax citizens and manipulation through the central bank meant there was less need to tax imports and fewer ties to real goods in general. The second part is so important because even if income tax was once again abolished in the US, it would not matter in the slightest for funding the US government. The government prints money to fund its endeavors beginning in 1913 and accelerating exponentially since 1971, which it could do more in the absence of income tax. This would be much easier for everybody, but the sense that the US has some fiscal responsibility and ties to real value would be lost even to those who don’t realize it already has.

Even Now, Tariffs Are a Tiny Portion of US Government Revenue

Going back all the way to the early 1800s, tariffs were extremely important to the federal government, consisting of 80+% of income and no means of printing their own money in a gold-backed monetary system. The “Tariff of Abominations” in 1828 was an attempt to increase tariff rates further to support industrial leaders at the time. Many southern states with a primary focus on agricultural and textile industries suffered as a consequence, planting the seeds for southern rebellion. Most notably South Carolina, these states pushed back aggressively and the government slowly lowered tariffs for the next 40 years.

Just before the Civil War began, tariffs were at a meager 15% which was low for the country. The recession in recent years gave precedence for renewed tariff legislation and increased government involvement. The “Morrill Tariff” was passed in 1861 which nearly doubled the effective tariff rate which of course helped spur the South to reach their boiling point. Lincoln came into office with the South refusing to pay any more tariff tributes to Washington DC and threatened any state with bloodshed that would not pay. While it feels good to paint Lincoln as the savior of liberty for slaves, this is an underrated cause of the Civil War according to the history books. It is also worth noting Lincoln was in favor of a central bank and government control over monetary and fiscal policy.

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. - Abraham Lincoln

With farmers getting the short end of the stick with tariffs for decades, income tax in 1913 which I discussed above was used as an excuse to lower tariff rates. This was relatively short-lived as the Great Depression gave rise to the return of protectionism once again with the “Smoot Hawley Tariff” in 1930.

This bill was less so a sweeping tariff across all imports as it had many exceptions and gave the president power to alter tariffs to pass, which laid the groundwork for the targeted tariffs of today. The consequences of Smoot Hawley are often attributed to contributing and even causing the Great Depression. While they certainly didn’t help, their impact is often overstated and once again hurt farmers the worst leaving them with income tax and renewed tariffs argued to protect the agriculture industry. In reality, this spurred aggressive retaliatory tariffs which were a big deal at that time which reduced global trade and decreased demand for exported agricultural goods. This lowered demand and thus prices for agricultural goods which left farmers in a tough spot. This led to further government intervention during the Great Depression like FDR’s Agricultural Adjustment Act which paid farmers to kill cattle and not plant seeds in efforts to support prices of agricultural products.

Tariffs were left less popular and the Depression progressed and in 1934 the era of tariff reductions began. This gave the president more power over tariff negotiations which was important in foreign policy for years while the world de-globalized. Now tariffs seem like a relic of the past, a blunt force tool being thrown around again by presidents today. While tariffs are not as widespread or important for revenue as they were, history shows us how the president ended up with the negotiating power as well as protectionist schemes for targeted industries crept in. Until next time,

-Grayson

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