Gregory Mankiw, the chairman of the White House Council of Economic Advisers, ignited what The Wall Street Journal called "a political firestorm" when, at a recent press conference, he ventured that the export of U.S. service jobs "is probably a plus for the economy in the long run." His argument, according to The New York Times, was that such exports would reflect an "expansion of free trade benefiting all nations, including the United States." For economists, the "long run" is when all economic theories come true—and when, in John Maynard Keynes's mordant quip, "we're all dead." Dennis Hastert, the Republican Speaker of the House, trapped in mere time, did not share Mankiw's Panglossian faith in free trade. Hastert conceded Mankiw's brilliance as an "economic theorist," but, he commented, "his theory fails a basic test of real economics." Then came the clincher, the kind of cheap but inarguable debater's point you'd expect from a politician. "An economy suffers when jobs disappear."
Keeping American jobs in America was the goal of trade policy from 1789 to 1933. Its instrument was the protective tariff, the most successful economic strategy in U.S. history. It is worth reviewing why the U.S. chose this path to development over free trade. Adam Smith, free trade's champion, had great prestige in America. In Wealth of Nations, published in 1776, he wrote, "All commerce that is carried on betwixt any two countries must necessarily be advantageous to both...." Consequently, "all duties, customs, and excise should be abolished, and free commerce and liberty of exchange should be allowed with all nations." Such was the "law of progress." What led America to break that law? And what can we learn from its decision?
The United States was born in protection—the first bill passed by the first Congress was the Tariff Act of 1789. Its purpose: to raise revenue for the new government and to aid in "the encouragement and protection of manufactures." President George Washington, who three months earlier had taken the oath of office wearing a homespun suit and who professed to eat as patriotically as he dressed ("I use no porter or cheese in my family, but such as is made in America") signed the bill on the Fourth of July—felicitously, for the tariff won America's economic independence.
The 1789 tariff was set too low to discourage imports, and for roughly the next fifteen years America freely traded with the world. It was a period of sailing-ship prosperity that rested on America's status as a neutral trading with both sides in the first round of the Napoleonic Wars. As early as 1785 Thomas Jefferson, who considered "free trade with all the world" a "natural right," had misgivings about America's dependence on commerce. Free trade, he warned, might not be free: "Our commerce on the ocean and in other countries must be paid for by frequent war." His fears were borne out during his second term as President, when Britain's renewed war against Napoleon rendered the oceans hazardous for U.S. trade. Napoleon's Berlin Decree establishing a blockade of Britain made fair game of American ships bound there: between 1803 and 1807 the French seized 389 of them. Britain's Orders in Council banned all American trade to Napoleon-dominated Europe. The British seized 528 American merchantmen and impressed thousands of American merchant sailors and, in the humiliating Chesapeake incident, a handful of U.S. Navy sailors as well. Trade had become so dangerous to peace that Jefferson placed an embargo on it lest the country be forced into a war for which, building cheap gunboats by the dozen to "protect us from the ruinous folly of a navy," he had left it unprepared. The embargo failed, Jefferson retired to Monticello, and war—"in defence of Free Trade and Sailor's Rights"—came.
To celebrate the return of peace crowds gathered on the docks of ports from Salem to Savannah. Shouting, "Have a care below! Off comes Madison's nightcap!" sailors threw off the tar-barrels used to cap the mast-tops of ships confined to port during the three years of "Mr. Madison's war." Amidst cheers for "Peace, Commerce, and Prosperity" down they fell in the spring of 1815 into a world in which sailing ships would never lead economies again. For war had brought a new kind of prosperity.