A history lesson of what not to do and yet may still come to pass.

October 5th, 2024

by Prof. Heather Cox – Richardson

Letters from an American

More politics rather than economics. Some of it does fit. The concept is political for an upcoming election.

William McKinley is having a moment (which I confess is a sentence I never expected to write). 

Republican presidential nominee Donald Trump is elevating McKinley, a representative from Ohio from 1877 to 1891 and president from 1897 to 1901, to justify his plan to impose new high tariffs. 

Trump’s call for tariffs is not an economic plan; it is a worldview. Trump claims foreign countries pay tariff duties and thus putting new tariffs of 20% on all imports, and as much as 60% on Chinese imports, will bring enough foreign money into the country to fund things like childcare, end federal budget deficits, and pay for the tax cuts he wants to give to the wealthy and corporations.

This is a deliberate lie. Tariffs are essentially taxes on imported products, and they are paid not by foreign countries but by American consumers. Economists warn that Trump’s tariff plan would cost a typical family an average of more than $2,600 a year, with poorer families the hardest hit;. Tariffs would spike inflation as high as 20%; result in 50,000 to 70,000 fewer jobs created each month; slow economic growth; and add about $5.8 trillion in deficits over ten years. It would tank an economy that under the Biden administration, which has used tariffs selectively to protect new industries and stop unfair trade practices, has boomed.

Trump simply denies this economic success. He promises to make the economy great with a tariff wall. On September 27, he told rally attendees in Warren, Michigan: “You know, our country In the 1890s was probably . . . the wealthiest it ever was because it was a system of tariffs and we had a president, you know McKinley, right? . . . He was really a very good businessman, and he took in billions of dollars at the time, which today it’s always trillions but then it was billions and probably hundreds of millions, but we were a very wealthy country and we’re gonna be doing that now . . . ”

By pointing to McKinley’s presidency to justify his economic plan, Trump gives away the game. The McKinley years were those of the Gilded Age, in which industrialists amassed fortunes they spent in spectacular displays. Cornelius and Alva Vanderbilt’s home on New York’s Fifth Avenue cost more than $44 million in today’s dollars, with stables finished in black walnut, cherry, and ash, with sterling silver metalwork. In cities across the country, the wealthy dressed their horses and coachmen in expensive livery, threw costly dinners, built seaside mansions they called “cottages,” and wore diamonds, rubies, and emeralds. When the daughter of a former senator married, she wore a $10,000 dress and a diamond tiara, and well-wishers sent “necklaces of diamonds [and] bracelets of diamonds, sapphires, and rubies.” 

Americans believed those fortunes were possible because of the tariff walls the Republicans had begun to build in 1861. Before the Civil War, Congress levied limited U.S. tariffs to fund the federal government, a system southerners liked because it kept prices low, but northerners disliked because established industries in foreign countries could deliver manufactured goods more cheaply than fledgling U.S. industries could produce them, thus hampering industrial development.

So, when the Republican Party organized in the North in the 1850s, it called for a tariff wall that would protect U.S. manufacturing. And as soon as Republicans took control of the government, they put tariffs on everything, including agricultural products, to develop American industry. 

The system worked. The United States emerged from the Civil War with a booming economy.

But after the war, that same tariff wall served big business by protecting it from the competition of cheaper foreign products. That protection permitted manufacturers to collude to keep prices high. Businessmen developed first informal organizations called “pools” in which members carved up markets and set prices, and then “trusts” that eliminated competition and fixed consumer prices at artificially high levels. By the 1880s, tariffs had come to represent almost half a product’s value.

Buoyed by protection, trusts controlled most of the nation’s industries, including sugar, meat, salt, gas, copper, transportation, steel, and the jute that made up both the burlap sacks workers used to harvest cotton and the twine that tied ripe wheat sheaves. Workers, farmers, and entrepreneurs hated the trusts that controlled their lives, but Republicans in Congress worked with the trusts to keep tariffs high. So, in 1884, voters elected Democrat Grover Cleveland, who promised to lower tariffs.

Republicans panicked. They insisted that the nation’s economic system depended on tariffs and that anyone trying to lower them was trying to destroy the nation. They flooded the country with pamphlets defending high tariffs. Cleveland won the popular vote in 1888, but Republican Benjamin Harrison won the electoral votes to become president. 

After the election, steel magnate Andrew Carnegie explained that the huge fortunes of the new industrialists were good for society. The wealthy were stewards of the nation’s money, he wrote in what became known as The Gospel of Wealth, gathering it together so it could be used for the common good. Indeed, Carnegie wrote, modern American industrialism was the highest form of civilization. 

But low wages, dangerous conditions, and seasonal factory closings and lock-outs meant that injury, hunger, and homelessness haunted urban wage workers. Soaring shipping costs meant that farmers spent the price of two bushels of corn to get one bushel to market. Monopolies meant that entrepreneurs couldn’t survive. And high tariffs meant the little money that did go into their pockets didn’t go far. By 1888 the U.S. Treasury ran an annual surplus of almost $120 million thanks to tariffs, seeming to prove that their point was to enable wealthy men to control the economy.

“Wall Street owns the country,” western organizer Mary Elizabeth Lease told farmers in summer 1890. “It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street.” As the midterm elections of 1890 approached, nervous congressional Republicans, led by Ohio’s William McKinley, promised to lower tariff rates.

Instead, the tariff “revision” raised them, especially on household items—the rate for horseshoe nails jumped from 47% to 76%—sending the price of industrial stocks rocketing upward. And yet McKinley insisted that high tariff walls were “indispensable to the safety, purity, and permanence of the Republic.” 

In a chaotic congressional session with members shouting amendments, yelling objections, and talking over each other, Republicans passed the McKinley Tariff in May 1890 without any Democratic votes. They cheered and clapped at their victory. “You may rejoice now,” a Democrat yelled across the aisle, “but next November you’ll mourn.” 

Democrats were right. In the November 1890 midterm elections, angry voters repudiated the Republican Party. They gave the Democrats a two-to-one majority in the House; McKinley himself lost his seat. Even Republicans thought their party had gone too far, and in 1892, voters gave Democrats control of the House, Senate, and White House for the first time since before the Civil War. 

Republican stalwarts promptly insisted that Democrats would destroy the economy by cutting tariff rates, and their warnings crashed the economy ten days before Cleveland took office. Democrats slightly lowered the tariff, replacing the lost income with an income tax on those who made more than $4,000 a year. Republicans promptly insisted the Democrats were instituting socialism. 

As the nation recovered from the economic panic of 1893, Republicans doubled down on their economic ideology. In 1896 they nominated McKinley for president. While he stayed home and kept his mouth shut, the party flooded the country with speakers and newspaper articles paid for with the corporate money that flowed into the Republicans’ war chest, all touting the protective tariff. Warned that the Democrats were trying “to create a red welter of lawlessness as fantastic and as vicious as the dream of a European communist,” voters elected McKinley. 

And then the Republicans had a stroke of luck. After the election, the discovery of gold on Bonanza Creek near the Klondike River in Canada’s Yukon Territory brought enough gold into the U.S. to ease the money supply, letting up pressure on both farmers and workers, and the fight over the tariff eased. 

It reemerged in 1913 when Democratic president Woodrow Wilson challenged the ideology behind Republican tariffs. A Democratic Congress cut tariff rates almost in half, from close to 50% to 25%, and to make up for lost revenue, Democrats put a tax on incomes over $3,000. Republicans complained that the measure was socialistic and discriminated against capitalists, especially the Wall Street community. 

As soon as Republicans regained control of the government, they slashed taxes and restored the tariff rates the Democrats had cut. This laid the groundwork for World War II by making it difficult for foreign governments to export to the United States and thus earn dollars to pay their debts from World War I. 

It also recreated the domestic economy of the 1890s. Congress gave the president power to raise or lower the tariffs at will, and in the 1920s, Republican presidents Harding and Coolidge changed tariff rates thirty-seven times; thirty-two times they moved rates upward. (They dropped the rates on paintbrush handles and bobwhite quails.) Business profits rose but wages did not, and wealth moved upward dramatically. By 1929, 5% of the population received one third of the nation’s income, and more than 60% of American families earned less than they needed for basic necessities.

When the bottom fell out of the stock market in 1929, ordinary Americans had too little purchasing power to fuel the economy. In June 1930, Republicans fell back on their faith in tariffs once again when they passed the Smoot-Hawley Tariff,* raising rates to protect American business. Other countries promptly retaliated, and the resulting trade war dramatically reduced foreign trade, exacerbating the Great Depression. 

When Smoot-Hawley failed, it took with it Americans’ faith that tariffs were the key to a strong economy. After World War II, ideological fights over the structure of the economy would be waged over taxes rather than tariffs.

Trump’s insistence a tariff wall will make America rich is not based in economics. Indeed, it would destroy the current system, which is so strong that modern economists are marveling. Trump is fantasizing about a world without regulations or taxes, where high tariffs permit the wealthy to collude to raise prices on ordinary Americans and to use that money to live like kings while workers, farmers, and entrepreneurs barely scrape by . . . a world like McKinley’s.