Mr. Husbands of San Francisco is a member of a national investment banking firm. He is a Trustee and past Chairman of the Board of The Foundation for Economic Education. This article is from his address at the Fall Meeting of the Board and guests at the Foundation, December 5, 1982.
It is my purpose to show that though the principles of free trade and no entangling alliances on which the nation was founded were unique and sublime, we find that economic fallacy, misplaced patriotism, and political compromise have combined to undermine the legacy of those principles.
In his first annual address to Congress in 1790, George Washington said “Observe good faith and justice toward all nations. Cultivate peace and harmony with all . . . The nation which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest . . . it is our true policy to steer clear of permanent alliances with any portion of the foreign world.”
In his first inaugural address in 1801 Thomas Jefferson stated that among his essential principles of governing would be a policy of “peace, commerce and honest friendship with all nations—entangling alliances with none.”
And so it was that the founding fathers understood that for free men to remain free they must remain strong in their defense but avoid meddling in other nations’ affairs.
The test of that resolution to remain free of foreign wars was to confront Washington and Jefferson in the first years of the Republic. A combination of events, including legislation passed as the Merchant Marine Act of July 4, 1789 and the acts of a quartet of Barbary powers were leading the nation to its first experience in foreign intervention, the results of which were as ambiguous as any of the dozen or so adventures abroad that were to follow to this day.
The Merchant Marine
The 1789 Merchant Marine Act instituted tariffs for revenue purposes, but with a tariff differential of 10% on any goods shipped in American holds. The effect in stimulating the growth of a distinctly American Merchant Marine was startling, for in 1789 the United States was carrying 17½% of her imports and 30% of her exports. Within six years these numbers had become 92% and 88%, and yearly tonnage under the American flag had grown from 123,893 tons to 529,471 tons.
To advocates of free trade, any reduction in tariffs is good, no tariffs better, but the outgrowth of this selective tariff disparity was the “American” merchant marine. The promotion and protection of its ships and men became a patriotic duty. Just one hundred years later, in 1881, William Graham Sumner considered the necessity of a national merchant marine, and wrote:
If Americans owned no ships and sailed no ships, but hired the people of other countries to do their ocean transportation for them, it would simply prove that Americans had some better employment for their capital and labor. They would get transportation as cheaply as possible. That is all they care for, and it would be as foolish for any nation to insist on doing its own ocean transportation, devoting to this use capital and labor which might be otherwise more profitably employed, as it would be for a merchant to insist on doing his own carting, when some person engaged in carting offered him a contract on more advantageous terms than those on which he could do the work.
The seizure of American merchant ships and sailors in the late 18th century by Barbary rulers, and to a lesser extent the harassment of American shipping by the picaroons of the West Indies, brought humiliation to the young nation. The resulting pressure on its political leaders led the country to embark on a program of rapid construction of six imposing frigates, the 44-gun “United States,” “Constitution,” and “President” and the 33-gun “Constellation,” “Chesapeake,” and “Congress.”
The construction of these first elements of the U. S. Navy found support from Northern ship- owning families, but only disinterest or even animosity from most Southerners, who were not as concerned about what flag flew over the ship that took their cotton to English and Continental mills.
The legitimate defense of the territory of the United States may have been a beneficiary of the emergence of the U. S. Navy, but the immediate stimulus to the construction of warships seems to have been the urgency to protect American civil shipping in far off corners of the world. The early adoption of a far-flung policing function for the U. S. government was a precedent which allowed later interventions abroad to come about with less controversy.
The Barbary Wars
The Barbary’ Wars were to last from 1800 to 1815, at a cost of hundreds of lives and millions of dollars for, at first, tribute and ransom, followed by the expense of construction of ships and naval operations in the Mediterranean. However, direct military intervention is only the most observable of the many ways in which we as a nation became “slaves to habitual hatred or fondness” for the people of other nations.
Were man perfectible the concept of nationhood might be obsolete. In the absence of that perfectibility, the nation state is likely to survive though I should hope as only a shadow of its present size. Man’s institutions, like man himself, are imperfect, and must be vigilantly watched lest they assume unintended roles. When acts are made in the name of the state which are contemptuous of liberty and the good sense of market economics, and which may in fact lead toward war, they must be exposed for the menace they may present to the Republic.
Rhodes Boyson, Britain’s Minister of Education, has likened man to a three-legged stool, one leg being moral or religious, one economic and one tribal. Dark deeds have been done in the name of each of these aspects of man’s character, but in this century the tribal and economic elements have dominated man’s actions, at least in the West. Economic fallacy teamed with rampant nationalism and without moral balance has proved to be a terribly costly affair in lives lost, economic deprivation and cultural undermining.
And so it is that military conflict stems not only from such obvious causes as pure territorial aggrandizement and gratification of monumental egos, but often from a military extension of economic fallacies. Economic nationalism is invariably a partner of military intervention.
Some of the fallacies and interventions that always accompany them, include notions of the necessity for:
(1) A favorable balance of trade.
(2) The protection of domestic industry.
A few of the interventions that logically proceed from these fallacies include protective tariffs, import quotas, domestic subsidies, antidumping laws, and currency controls.
Underlying all of these interventions is the notion that government through fiat actions can cause beneficial outcomes without offsetting costs. One does not have to be the complete cynic to suggest that what might be argued on the theoretical level in economic terms comes down in fact to a political formula: Can one group of voters be satisfied through a visible hand-out while another group of voters, affected adversely, and often unknowingly, by interventionist legislation, be mollified through dissembling and obfuscation?
One of the textbook excuses for tariffs has been that they were necessary to protect infant industry. Now that has been modified so that we are led to believe we must also protect mature, ailing industry. In fact, it is only with free trade that entrepreneurs are encouraged and noncompetitive enterprises are culled out, and these are two sides of a vigorous, productive and free economy.
There are then the laws which reinforce the notion that exports are better than imports, known as a “favorable” balance of trade. Bastiat, the 19th-century French economist, took the favorable balance of trade argument to its logical end, and suggested that were such a thing so desirable, the custom agents should record the export of French silks to Britain and hope the ships will founder, since the result would be a recording of, say, 1,000,000 francs as an export and no offsetting import, since the silk manufacturer has received no payment with which to purchase British goods. The result would be a favorable balance of trade, but we needn’t envy France for having achieved that goal.
Balance of Payments and Balance of Trade
Balance of payments refers to the accounting between nations of all goods, services and financial transfers. On a pure gold standard or pure flexible exchange rate basis, balance of payments tend to balance on a regular basis. Balance of trade is this figure less “invisibles” or cash transfers.
Jacques Rueff demonstrated in his book Balance of Payments that France had an “unfavorable” balance of trade with Germany for over 50 years from 1870-1933, with the exception of the four years after the Franco-Prussian War, when France was making reparation payments to Germany. Again, the act which causes the “favorable” balance of trade is obviously not in the interest of French citizens at large, but may only favor certain special interests. The reason for the long period of French-Prussian balance of payments situation was, of course, the result of the dominant French investments in Germany.
This necessitated a French “unfavorable” balance of trade in order to offset intangibles such as dividends and interest accruing from French investments in Germany.
Milton Friedman has made the observation that the most favorable situation that could visit a people would be that in which we send dollar bills to Japan in exchange for automobiles, and the exchange ends there. If Japan were a willing partner to that transaction we could all retire. The absurdity is obvious.
Extending the Logic
What difference, in moral or economic terms, is there between a New Yorker buying an automobile built in California by a naturalized Japanese-American or an automobile built in Yokohama by a Japanese national? Yes, one is American and the other Japanese, but if that argument has merit why not extend it backward and suggest that no New Yorker buy anything not made in New York, or extend it even further, and suggest that it would be in the interest of the denizens of Manhattan to buy no item not made on the island. One thing, for sure, there wouldn’t be much to eat, certainly no bananas.
Unfortunately, the Constitutional prohibitions against tariffs did not extend to international trade.
One often hears that free trade is fine, but not unfair trade, that being defined variously as everything from foreign government subsidy of exports to foreign workers receiving relatively lower wages. “Dumping,” a useful pejorative, is generally considered the extreme variant of un fair trade. Dumping refers to goods being sold in this country at a price below which they are sold in the country of origin. I daresay the network news commentators would look with favor on an announcement by the British government that it was going to give away 10,000 Rolls Royces to a random group of lucky American citizens, in gratitude for American help in World War II.
It is highly unlikely that even the American automobile industry could rally much of a boycott against such an act, though it would remove those 10,000 individuals as potential customers for Detroit autos. There is no economic difference between such a daft proposal and that act of constructing and operating the Concorde supersonic aircraft, with losses made up each day by French and British taxpayers. Each traveler on the Concorde could consider the advantageous speed the aircraft offers as a partial gift by those taxpayers. However, the United States should have a difficult time working up much of a lather over foreign government subsidies for their businesses when we have such institutions as the Export-Import Bank, agriculture subsidies and Federal insurance on foreign investment.
Tariffs for Protection
U. S. tariffs were primarily a revenue-raising device prior to the Civil War. The first tariff passed in 1789 raised half of the nation’s fiscal needs, and by 1808 duties were providing twice the federal government’s expenditures. By 1816 tariffs were becoming specifically protective and by the 1970s when revenues from duties only totaled 10% or so of the budget, their nature had evolved almost purely into protectionist devices.
Historically, Republicans have been defenders of high duties, Democrats lower duties. At the moment, sympathy for protectionist tariffs seems to be a bi-partisan affair. As mentioned earlier, protectionist tariffs have always been introduced on the ground that a particular industry is threatened by foreign competition. For the sake of jobs and the long-term future of the country, imports, under this persuasion, must be selectively restricted. What those advocates fail to point out is that for everyone who benefits from tariffs there are others, perhaps less observable, who are being economically punished.
The recently passed quotas on the importations of steel, at the behest of domestic steel management and labor leaders, have received nothing but plaudits by the favorably affected industries and the media, though often couched in terms such as “the act is too little or too late.” One would have to seek out journals of economic opinion, and selective ones at that, to find mention of those who suffer as a consequence of those import quotas.
Currency restrictions and pegged exchange rates are put in place to cover up governmental overspending and inflation, and to exert control over citizens in their attempts to make voluntary transactions with others or to avoid government’s confiscation of their accumulated wealth. It is a delaying tactic; no matter how severe the penalty, if the free market exchange ratio of two currencies is different from that dictated by government, the pegged price will be undermined by market forces resulting in sudden and catastrophic devaluation. U. S. laws to make it a felony to move more than $5,000 in or out of the country without reporting it only reinforce those who see it their business to run others’ lives.
However, the most melancholy of all these false economic persuasions is autarky or National Economic Independence. What inevitably follows the embracing of this concept is the implied or real expansion of national borders with consequent recourse to military action. One of the major differences that divided
Hitler and his finance minister, Hjalmar Schacht, was over this concept of economic independence. How unsettling when we have words from Wall Street to Washington that sound so familiarly like those of Hitler when he suggested the necessity for economic mobilization “comparable to the military and political mobilization.”
The Pattern of Controls
Though the imposition of Wage and Price controls in 1971 was done in the name of controlling inflation, those controls remaining on oil and gas caused the government to begin to intervene in the classic manner of politicians anywhere who believe in the economic and political benefit of autarky.
The United States is widely regarded as the marginal factor in world production and consumption of oil. The steps that follow essentially led this country to place a floor under the price of oil not a ceiling over the price of oil as the Department of Energy bureaucracy would have led us to believe.
Step 1. 1971—Wage and Price controls instituted.
Step 2. Most controls removed in 1973 but kept on oil and gas.
Step 3. OPEC raises prices drastically.
Step 4. We counter, irrationally, with the “entitlements” scheme encouraging imports, and price controls, discouraging domestic production.
Step 5. We don the national hair shirt of a contrived energy crisis and directly intervene in the auto industry through mileage requirements and 55 m.p.h, speed limit.
Step 6. This forced draft downsizing causes extraordinary capital expenditures and dislocations in the American automobile industry.
Step 7. Japanese and German auto manufacturers find themselves in the fortuitous position of manufacturing automobiles that are now perfect for the American market, this having come about because of their own governments over the years imposing three times the taxes on gaso line as in the U.S.
Step 8. The U. S. government urging National Energy Independence through subsidy and tax break, resulting in unnecessary and uneconomic allocation of capital to “alternate” fuel sources.
Step 9. All of this resulting in a disabling of the domestic automobile and steel industries and immeasurable costs to all the Western world.
One frequently hears that our presence in the Middle East is necessary to protect “our” oil. The implication is that in our absence, the oil would necessarily fall into unfriendly hands and those parties would then embargo exports to the United States. Ironically, Business Week reports on November 8, 1982, that “Standard Oil of California and Texaco are reportedly trying to minimize their take of Saudi oil in favor of cheaper Russian and Mexican oil.” In fact, another “lubricant,” ball bearings, owes its existence to the importation of chromium ore. Ninety per cent of what is used in this country comes from abroad, the Soviet Union being one of the largest suppliers.
Does our dependence on importation of chromium or other exotic minerals require government’s intervention to insure supplies? I would suggest quite the contrary, for it is the reliance on the market place and individual initiative which will insure our supplies. As Hans Lands-berg, Senior Fellow at Resources for the Future, says in a Forbes article of November 22, 1982: “We preach belief in market forces but we abandon reliance on them too easily.”
Intervention Policies at Home Lead to Conflict Abroad
Each step we take to insure National Economic Independence carries us ever closer to military conflict. Our Middle Eastern commitments have now grown to the point that troop strength assigned to the Rapid Deployment Force is 230,000 soldiers, sailors and marines, that number to double in coming months. Its assigned area of operations will cover 20 countries in the Middle East, excluding Israel. The force, it is reported, will take on responsibility with the objective of strengthening friendly nations politically and militarily. How far removed that notion is from those admonishments of George Washington at the founding of the Republic!
A logical step that follows the notion of economic independence is the use of sanctions and embargoes. It is with these acts that we skate close to the pitfall of war. The problem is that sanctions by definition inhibit the market and precipitate reactions from perceived or real enemies which may have been unnecessary in their absence.
Pinpointing the root cause of any war is precarious. A colleague noticed some graffiti in San Francisco around Columbus Day which said: “World War III started when Columbus took away the land from the Indians.” Of course, using that logic, the apple would be at the core of all our problems. One can, nonetheless, wonder whether the oil and steel embargo of Japan and the resulting fall of the Konoye government in October, 1941 did not in turn lead to the controversial exchange of the Greater East Asia Co-Prosperity Sphere for Communist hegemony throughout a major part of the Far East. The resultant loss of lives made the earlier Rape of Nanking appear an almost minor tragedy of this tragic century.
Steps for Survival
But what steps should the United States take to insure its survival in what can be a most unfriendly world?
It first must insure its priorities are right from the perspective of its uniqueness as a liberty loving, free market, limited government example to the world. Free trade is an inherent part of that profile. The maintenance of the military necessary to defend the country from aggressive acts can only be consistent with the American ideal of choice if it is maintained by voluntary enlistment. One hears much about one’s obligation to make a “fair share” contribution to causes. There is a rule of thumb that in voluntary associations, 20% of the members contribute 80% of the time and money necessary to keep the effort going. Any notion that even with a draft there is an even sharing of responsibility for the defense of the country falls in the face of the evidence that few soldiers in any war are in line operations, and one study shows that fewer than 50% of those actually fire at the enemy.
Ronald Reagan said in a letter to Senator Mark Hatfield on May 5, 1980 that “draft registration may actually decrease our military preparedness, by making people think we have solved our defense problems when we have not . . . . But perhaps the most fundamental objection to draft registration is moral. Only in the most severe national emergency does the government have the claim to the mandatory service of its young people. In any other time, a draft or draft registration destroys the very values that our society is committed to defend.”
Milton Friedman in a debate with a U. S. general at Stanford University defended the pro-volunteer Army position. The General scoffed that he did not want to be defended by “an army of mercenaries.” “Would you rather,” Friedman replied, “be defended by an army of slaves?”
With the exception of President Reagan’s implication that there might be emergencies in which the draft was desirable, I would otherwise agree with both in abhorrence of the use of force to conscript people to defend the country.
The full-time job is the nourishment of the precepts of liberty at home and noninterference with other nations’ affairs abroad. There will always be good men and women who will come to the defense of such an arrangement.
If foreign intervention tends to erode domestic liberty—as I would contend—there may still be instances where American citizens wish to put in with others they perceive to be suffering. The repeal of the legal inhibitions, including the Logan Act, preventing individuals from aiding those in other nations would expand free choice with no perceived risk to a nation bent on limiting its government’s role.
Obviously, it is the understanding of and the willingness to stand by the principles of free choice which underlie the maintenance of a free society. What could be better than a rereading by veterans of free market theory or a first reading by a novice of Bastiat’s works, or Henry Hazlitt’s Economics In One Lesson or Leonard Read’s “Conscience on the Battlefield” to make certain the argument on behalf of freedom remains articulate and principled?
Above all else it is vital that if the case for liberty is to prevail, the dangers of war posed by imposition of foolish economic theories be recognized and free exchange be applied to international as well as domestic trade. The saying is as true today as it was a century ago, “If goods do not cross borders, soldiers will.”