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McKinley, Tariffs and Trump

McKinley, Tariffs and Trump
President William McKinley, 1900

On June 19, 2024, President Donald Trump posted a short statement on Truth Social, which stated:

 ‘The Smoot-Hawley Tariff Act was passed AFTER the Great Depression had already started. If you want to study Tariffs, and how powerful they are, study the administration of President William McKinley. America had so much money they didn’t know what to do with it!’

Almost simultaneous with the issuance of this statement, in another venue, Trump indicated interest—although he did not issue a full endorsement—in the proposal by Congressman Thomas Massie to impose a 10 percent general tariff on imports, the revenue from which would be used to lower federal income tax rates. More on this proposal later in this piece.

A Brief Historical Primer

Prior to the mid-20th century, for most of American history, high tariff rates were a cornerstone of American economic policy. From 1789 to 1950 tariff rates almost never dipped below 20 percent, with tariffs of more than 45 percent imposed four times: 1) The 1828 Tariff (under John Quincy Adams), 2) the 1861 “Morrill Tariff” (under Abraham Lincoln), 3) the 1890 “McKinley Tariff” and 4) the 1930 “Smoot-Hawley Tariff.”  For 40 years, from 1861 through 1901, tariff rates averaged over 45 percent. This was the “era of American protectionism,” and its chief champion was Congressman and later President William McKinley.

In recent decades it has been fashionable to dismiss tariffs as woefully outmoded, crude relics of a bygone era, or no longer desirable in our current global marketplace. But the reality is that they worked magnificently. Between 1861 and 1901 the United States created the greatest industrial revolution in human history, an in-depth revolution permeating every aspect of manufacturing, agriculture, energy, and infrastructure. 

It should also be noted that during those 40 years, income from the tariffs accounted for anywhere between 33 percent and 50 percent of all federal revenue, depending on the individual year and the fluctuation in certain tariff rates.

Under McKinley, tariff policy was not some brute-force “trade war” policy. Despite the high rates, McKinley championed what he called a policy of “Reciprocity.”  For example, in 1891 tariff rates on Great Britain were increased from 35 percent to 43 percent, due to the British practice of dumping cheap goods on American markets while imposing a high tariff on the importation of American goods. Yet, many other countries which traded with America had their tariff rates reduced, and the McKinley Tariff actually eliminated tariffs altogether on certain items, including sugar, molasses, tea, and coffee. It authorized the President to reinstate the tariffs if the items were exported from countries that treated U.S. exports in a “reciprocally unequal and unreasonable” fashion. The over-riding intention of the McKinley tariff was to protect and promote American manufacturing. Although firm, the policy was conducted in a spirit of mutual friendship, as President McKinley enunciated in his last public speech, on the subject of “Reciprocity,” at the Pan-American Exposition in 1901.

Smoot-Hawley

Like the McKinley tariffs, after 1945 the Smoot-Hawley tariff of 1930 became the object of derision among Ivy League economists. It became de rigueur to blame the Tariff as a contributing factor leading into the 1930's depression. None of that is true. By the time of the Wall Street crash of 1929, the entirety of the European financial establishment, and by extension the banking and investment houses in America, was imploding under the strain of mountains of usurious debt. This culminated in the catastrophic collapse of the Austrian Creditanstalt bank on May 11, 1931, the Landesbank der Rheinprovinz on July 11, 1931, and the Danat-Bank on July 13, 1931. On July 15, 1931, Germany abandoned the gold standard, and the British Empire followed suit on July 15, 1931. U.S. financial institutions suffered enormous losses. Manufacturing and agriculture were devastated. Tariff policy played no role in creating this crisis. The economic collapse was entirely a product of the usurious practices of the British Central Banking System. 

Smoot-Hawley was an attempt to protect American manufacturing as this crisis escalated. It reimposed the highest tariff rates of the 1891 McKinley tariff. Critics of Smoot-Hawley point to the retaliatory tariffs imposed on U.S. products by (in particular) Britain and Canada, and to the sharp decline in U.S. exports between 1931 and 1934 as proof that the Tariff failed. But putting to one side the question of trade, under Smoot-Hawley the decline in U.S. manufacturing and agriculture—which was well-underway in 1928-1929—was slowed, and even in some sectors reversed, as U.S. production was reoriented toward the domestic market.

The key problem which prevented Smoot-Hawley from realizing its full potential was the absence of a Hamiltonian National Banking system in America. Smoot-Hawley dealt with trade, but the more important issue of credit and monetary policy was controlled from the City of London. This was a vulnerability which earlier—in the Panics of 1893 and 1907—had repeatedly damaged the Lincoln-McKinley economic development policies. By 1931, the destructive axioms of imperial finance had created a crisis of such magnitude that tariff legislation was not enough to reverse the collapse.

The Modern Free Trade Era

Franklin Roosevelt is often portrayed as anti-tariff. This is simply not true. Yes, he opposed Smoot-Hawley, and after 1934 he reduced tariff rates. But at the time of Roosevelt’s death in 1945, U.S. tariff rates still averaged 38 percent, almost double of what existed under Woodrow Wilson in 1920. Then, everything changed under Harry Truman. In 1947, the United States became a founding member of the General Agreement on Trade and Tariffs (GATT). Between 1947 and 1950, in just three years, U.S. Tariff rates were slashed from more than 35 percent down to 14 percent; then they continued to be ratcheted down to less than 5 percent by 1975. In January 1995, the United States became a founding member of the World Trade Organization (WTO), ushering in the last 30-year era of unbridled free trade and the almost complete disappearance of manufacturing inside the United States.

The Massie Proposal

Congressman Massie has proposed a 10 percent general tariff—which would merely return us to the already low tariff rate of 1960—and the elimination of the personal income tax, using tariff revenue to replace tax revenue. Some have called this a hare-brained idea and just another example of the Freedom Caucus’ ongoing obsession with “cutting taxes.”  Regardless of the merits or demerits of Massie’s proposal, however, what he proposes has historical precedent.

In 1892, somewhere in the range of 40 percent of Federal Revenue came from the McKinley Tariff. At the same time, almost 35 percent of Federal Revenue came from steep excise taxes on Alcohol, with additional revenue from other excise taxes, particularly on tobacco. It should be noted that the push to establish a national income tax occurred in tandem with the attack on the McKinley Tariff. In 1892, the Democrats took control of Congress and the White House. They passed the Wilson-Gorman Tariff, which reduced tariff rates by 10 percent. Simultaneously, they adopted the first peacetime income tax, explicitly—as stated in their own speeches—to replace the revenue lost from the lower tariff rate.

In 1895, the U.S. Supreme Court ruled this income tax unconstitutional, setting the stage for the effort to pass a Constitutional Amendment legalizing the income tax. That effort was led by Teddy Roosevelt and later Woodrow Wilson, both pro-income tax and anti-tariff. Tariff rates were reduced dramatically (by more than 50 percent) under Woodrow Wilson, and it is also useful to note that with the enactment of Prohibition in 1920, the government also lost all the revenue from the alcohol excise taxes, thus increasing the pressure to generate larger tax revenue on individual incomes.

The Takeaway

This short piece is neither an argument for nor against the Massie proposal. Rather, the purpose is to propose that a radical re-thinking of tax, tariff and trade policy is now required.

America is fast approaching the condition of a third world “developing nation.”  We have lost hundreds of thousands of factories. We produce almost nothing. Go into a Wal-Mart, a Home Depot, or shop on Amazon. Almost everything is imported, even in industries that still exist in reduced capacity, like Aerospace or the Auto industry. Look at the machines being employed; look at the individual parts used in the final product; look at the bolts, the machine tools, the electronic components. Almost all are made overseas.

It is certainly undeniable that the key to rebuilding our productive economic base is to implement a Hamiltonian Credit policy to provide a flow of investment into productive activity, while we shut down the financial speculative practices that have destroyed us. But at the same time, recognize the destruction that has been done. We don’t want to build up American infrastructure with machines and materials imported from overseas. We need to produce what we need.

It is the view of this author that Smoot-Hawley was not a failure, and that Trump’s proposed 10 percent tariff is, in fact, very modest. A McKinley Tariff and a Hamilton National Bank are complimentary and, together, will rescue our nation.