The first Treasury secretary backed tariffs mostly to raise revenue and promote free trade.
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Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer have invoked the policies of the first Treasury secretary, Alexander Hamilton, as precedents for President Trump’s trade agenda. Hamilton, the finance wizard of George Washington’s administration, “touched the dead corpse of the public credit, and it sprung upon its feet,” in the words of Daniel Webster. He is the most respected financial officer in U.S. history. Enlisting him in support of the president’s trade policy would certainly lend credibility to a policy that so far, by most economic measures—including economic growth and real disposable personal income—has failed.
Since Hamilton can’t defend himself, we’d like to defend him against the claim that he would support Mr. Trump’s protectionism. In Hamilton’s 1791 Report on the Subject of Manufactures, he made the case for government encouragement of American manufacturing in a world dominated by European powers that, he worried, could easily refuse to export their manufactured goods to America in exchange for American agricultural products. As Hamilton explained, “if Europe will not take from us the products of our soil, upon terms consistent with our interest, . . . there is no other expedient, than to promote manufacturing establishments” at home. Promotion of U.S. manufacturers could be provided by protective tariffs or, even better in Hamilton’s view, by subsidies.
Messrs. Bessent and Greer claim that the Trump administration is simply reviving the Hamiltonian trade policy that created the American economic colossus. But in the 21st century, when the average trade-weighted tariff rate of Organization for Economic Cooperation and Development member countries was below 3% and almost identical to that of the U.S., and the OECD found that the nontariff barriers of U.S. trading partners aren’t significantly higher than America’s nontariff barriers, it’s highly doubtful that Hamilton would support Trump policies. Hamilton in essence rejected Mr. Trump’s tariffs when he argued in his report that “if the system of perfect liberty to industry and commerce were the prevailing system of nations, the arguments which dissuade a country in the predicament of the United States, from the zealous pursuits of manufactures would doubtless have great force.”
It’s true that Hamilton endorsed some elements of the infant-industry argument for tariffs, but he did so because American industry then was indeed in its infancy. America today occupies a completely different position, with productivity per manufacturing worker in the U.S. about 10 times as great as in China, U.S. capital markets as large as the rest of the world combined, and America now in its second century of dominating innovation and technological development. The conditions that led Hamilton to support tariffs have long since disappeared. He never saw protection of domestic manufacturing as a long-term policy but rather insisted that “continuance of bounties on manufactures long established must almost always be of questionable policy.”
Especially noteworthy is Hamilton’s conviction that among the greatest forces fostering U.S. industrialization was its trade deficit and resulting capital surplus, while Mr. Trump sees the U.S. trade deficit as a crisis and net foreign lending and investment in the U.S. as a “hemorrhaging of America’s lifeblood.” Hamilton described net inbound foreign capital as “a precious acquisition . . . a most valuable auxiliary, conducing to put in Motion a greater Quantity of productive labour, and a greater portion of useful enterprise than could exist without it.” During the country’s first century, we routinely ran trade deficits as the British and Dutch invested heavily in America. They grew wealthy on those investments, and so did America.
The protectionist paternity claim against Hamilton fails, as does the claim that tariffs industrialized America. Missing from this protectionist story: Unlike today, in the 18th and 19th century Congress had no power to tax incomes, so most revenue came from customs collections. Hamilton knew that high protective tariffs, by discouraging importing and encouraging smuggling, suppressed those collections. As Dartmouth’s Douglas Irwin notes, the tariffs Hamilton proposed in his report and Congress adopted were “not highly protectionist duties because Hamilton feared discouraging imports, which were the critical tax base on which he planned to fund the public debt.” During Hamilton’s tenure as Treasury secretary, his focus in setting tariffs was to pay the government’s bills, not to protect domestic manufacturing.
Protectionist forces didn’t triumph in Congress until passage of the Tariff Act of 1816, long after Hamilton died. That movement peaked with the adoption of the Tariff of Abominations in 1828, causing an electoral bloodbath for its proponents. After reaching an all-time high of 57.3% in 1830, the average tariff rate on all imports was slashed by 74% over the next 31 years.
The results for American industrialization are revealing. From 1816 through 1830, industrial production grew at an average annual rate of 4% as tariffs rose. From 1831 through 1860, industrial production exploded by 6.7% a year as tariffs fell. During the Civil War, tariffs were again raised, but between 1866 and 1900 average tariff rates fell from 41.8% to 27.6% and industrial production grew at an average annual rate of 5.6%. In the 19th century industrialization occurred most rapidly when tariffs were falling, not when they were rising. By the turn of the century President William McKinley, whom President Trump often cites as a role model for his tariff policy, was calling for freer trade because “the period of exclusiveness is passed. The expansion of our trade and commerce is the pressing problem.”
Nineteenth-century industrialization wasn’t fueled by protective tariffs. Instead, as economist Frank Taussig concluded in 1915, it was fueled by “the intelligence and inventiveness of the people; these being promoted again by the breath of freedom and competition in all their affairs.” And as Albert Gallatin, the longest-serving Treasury secretary, earlier observed, “to ascribe that unexampled and uninterrupted prosperity, which even legislative errors cannot arrest, to a tariff is one of the most strange delusions by which intelligent men have ever suffered themselves to be deceived.”
Mr. Gramm, a former chairman of the Senate Banking Committee, is a nonresident senior fellow at the American Enterprise Institute. Mr. Boudreaux is a professor of economics at George Mason University and the Mercatus Center. Michael Solon contributed to this article.