Some Aspects of the Tariff Question
Part III, Chapter XI
The present chapter makes a digression. We leave for the moment the history of the iron industry and turn to copper. Yet there is no digression as regards the sequence of thought. The course of events in the copper trade serves to illustrate further what was said in the preceding chapter concerning the difficulty of proving whether protection has been applied with success to a young industry, and to show the need of discrimination in the interpretation of historical and statistical data.
The duties on copper received little attention during the greater part of the period covered in this volume. But during some of the earlier years they were much discussed. Their history centers about the act of 1869, by which for the first time a considerable protective duty was imposed. Before the civil war copper in bars or pigs was subject to a nominal duty only—5%; copper ore was free. During the war the duty on copper was raised to two and one-half cents a pound, copper ore being subjected to the nominal duty of 5%. The act of 1869 imposed a duty of five cents a pound on copper, and, what was quite as important, one of three cents a pound on the copper content of imported ores. The measure was frankly protective, and in accord with the general drift of the time. Congress was then extending and stiffening the high duties for which the exigencies of the civil war had given occasion. The copper bill was vetoed by President Johnson, but passed over his veto, being aided in its passage by the bitter contest between the President and the dominant Republicans. The duties then established remained in effect without change until 1883. In that year they were reduced slightly, the rate on copper being fixed at four cents. In the McKinley act of 1890 a sharp reduction was made,—one so considerable as to mark a turning point: the duty on copper was fixed at one and one-quarter cents, that on the copper content of ore at one-half cent. The act of 1894, as might have been expected, went still farther, and admitted copper in all forms free of duty. Thereafter it remained free. The effective protection was thus maintained for about twenty years, from 1869 to 1890. That the process of reduction should have been carried so far in the protectionist act of 1890 indicated that even at this comparatively early date the duty was felt to be of little consequence. Whatever effects, good or bad, are traceable to the copper duty must be searched for in the period before 1890.
Turning now to domestic production, we find a plain and uncheckered situation: rapid and continuous growth. In 1869 the domestic output was 28 millions of pounds; in 1880, about 60 millions; in 1890, after a decade with an unparalleled rate of growth, 265 millions. After 1890 the advance continued year by year; and in 1910, the annual output exceeded 1,000 millions of pounds. The United States had become the greatest copper producing country in the world. So far as concerns the growth of domestic production, the apparent success of the protectionist policy is so extraordinary as to suggest at once the need of cautious interpretation: the figures on their face seem to prove too much.
Not only was there this vast increase in domestic output: exports set in early and soon reached great dimensions. Some slight imports continued for a few years after 1869, insignificant as compared with the home product. About 1880 exports began; fostered for a time (as will presently be explained) by a "dumping" policy on the part of the copper producers, but rapidly passing beyond this semi-artificial stage, and developing as normal exports. By the middle of the decade, 1880-90, they attained each year dimensions considerable in comparison with the output,—10 per cent and more. After the changes of duty in 1890 and 1894, and especially after the removal of all duties in the latter year, the course of international dealings became radically different from what it had been before. A larger and larger proportion of the mounting domestic product was sold in foreign countries, until by the close of the century the foreign consumption exceeded the domestic. Copper became one of the leading articles of export from the United States. At the same time, with the complete abolition of duties, a large transit trade developed. Copper was imported both in the form of ore and of bars, and then reëxported. The great smelting and refining establishments handled both domestic and imported ore. All in all, the United States became the dominant country in the world's copper markets. In no branch of industry has American progress been more great or rapid, in none has the "American invasion" been more spectacular.
The course of prices was such as must be expected with a development of this sort. The chart on page 164 tells the story at a glance.*32 For the first decade after the imposition of the duty in 1869 the price of copper in New York was higher than the price in London, the difference being usually the amount of the duty, not far from five cents a pound. In other words, the ordinary effect of a protective duty appeared. During the next decade there was unstable equilibrium: the American price was at times somewhat higher than the British, at times lower, but with no divergence at all equal to the duty (four cents under the act of 1883). And in the next decade, all difference in price ceased. Even before the complete abolition of the duty (1894) domestic and foreign prices became virtually the same. After 1894 they necessarily moved together.
The chart has every feature of what might be called a representative young industries chart. So far as concerns the relation between domestic and foreign prices, it is precisely like the chart showing the course of steel prices abroad and at home.*33 For a few years after the imposition of the copper duty, domestic price is raised by the full amount of the duty. As time goes on, domestic price falls nearer and nearer to the level of the foreign, until finally all difference ceases. The American consumer in the end gets his copper quite as cheaply as if it were imported. Moreover, in this instance the consummation was reached promptly, and the abolition of the protective duty also came promptly. The other data seem to be confirmatory: there is rapid and great increase of production, displacement of imports, complete independence of foreigners. The protectionists may be expected to point with pride to this record.
Yet in fact the case has rarely been cited by the protectionists; partly perhaps because of alleged monopoly and manipulation on the part of the domestic producers, but chiefly because the not unfamiliar history of the industry shows that the tariff in reality was of little consequence. The extraordinary progress of the industry was obviously due to the discovery and exploitation of great natural resources,—resources so rich and so tempting that the same effects on production, prices, and international trade would have come about, whatever the rates of duty.
Three episodes stand out: the development of the copper mines in the Michigan peninsula, the discoveries in Montana, those in Arizona and the southwest. These are significant for the tariff situation in their chronological order. Indeed, the earliest (the Michigan case) is the only one in which some influence from the duties might be sought with any show of plausibility.
That there were rich deposits of copper in the now famous peninsula of Michigan had long been known; the distribution of the "native" copper among distant Indian tribes had early attracted the attention of travelers and ethnologists. Some appreciable production of copper from this source took place before the civil war. Whatever copper was then produced in the country came from the Michigan region; and it remained virtually the only source of supply until the decade 1880-90. The remoteness of the peninsula, its dense primeval forests, the rigorous winter climate, stood in the way of systematic exploitation with large capital outlay.
That stage was reached in the middle of the decade 1860-70. There had been a steady increase in the Michigan output during the first half of that decade; then came a sudden burst. The renowned Calumet & Hecla mine was opened in 1866, and began almost at once to turn out great quantities of copper.
The story of Calumet & Hecla is typical, and not so simple as is implied in most versions and allusions. It was by no means a case of treasure-trove,—a pile of riches uncovered at a stroke and easily turned to account. The mine proved indeed to contain the best deposits in the district; but before this was ascertained, heavy investments had to be made and great risks taken. Many persons refer to copper mining, and especially to a famous mine like the Calumet & Hecla, as if it were a mere matter of digging out of the ground shining lumps of pure vendible copper. The metal in fact is obtained by working over vast quantities of hard copper-bearing rock brought up from great depths; the interior must be carefully explored, developed, preserved from caving in; expensive hoisting apparatus must be installed, with crushing machinery, water supply, a railway for carrying the rock to the water, and so on. The whole calls for heavy investment and for great initial risks. Even in this case, where handsome returns came in at a comparatively early stage, there were several years of uncertainty, of false starts and ill-devised apparatus, of imminent failure. Had it not been for the extraordinary energy, courage, technical and administrative ability, of the younger Agassiz, and the unflinching persistence of his associates—they staked their all—the venture would have been not phenomenally profitable, but utterly disastrous. How far under such circumstances, a fortune, if it finally comes, can be said to be earned, or in what measure successes are offset by failures, prizes in the lottery by blanks,—this is one of the problems of economic principle and economic policy to which it is most difficult to give an answer in precise terms.*34
But the particular question here under consideration can be answered with ease and certainty. It is not the question whether mining enterprises in general, with their need of great investment and assumption of heavy risks, do or do not come within the scope of the young industries argument. There may be some ground for maintaining as a matter of general reasoning that, even though minerals be classed as "raw materials," the essential reasons for giving aid to nascent industries still hold. In this instance, however, it appears that the young industry was started and was being actively prosecuted before protection was applied. The decisive experiments and investments were made in 1867-68; by 1868 success was in sight; dividends on Calumet & Hecla began in 1869 and thereafter were continuous and generous. And it must be remembered that this mine never stood alone. Though the largest and most conspicuous in the Michigan group, it was not the earliest, nor the only one amply profitable. The production of copper in the peninsula was already considerable when the Calumet & Hecla mine began, and continued to grow from various other mines as well. The duty of 1869 clearly was superfluous as a device for encouraging ventures still in the experimental stage.*35
During the decade 1870-80, as has just been pointed out, the price of copper in the United States was higher than the English price, and during a considerable part of the decade it was higher by the full extent of the duty. There being no ground for giving any credit to protection because of its having given needed aid to a young industry, the free trader can find nothing to balance the loss then caused to the community by the tariff charge. And for a year or two at the close of this period he adds something to his indictment; the charge on the community was made higher by combination among the copper producers. The mining companies of Michigan then produced almost all the American copper; price agreements among them were not difficult to arrange; the increasing output caused prices to fall, especially during the years of depression that followed 1873. In 1879-81 there was a combination, and an abrupt rise in prices,—the latter furthered of course by the revival of industrial activity. To maintain prices at home, the combinations sold for export at lower prices. It was a clear case of dumping, explicable on the theory of monopoly price. As it happened, the combination found itself plagued unexpectedly by the return to the United States of part of the copper which had been sold abroad at the low export price: the domestic price soared so much that it proved profitable to bring back some of this copper and sell it in the United States even after paying duty. The whole train of events serves to illustrate both the ordinary operation of protective duties and those concomitants which appear when the protected producers combine. It has to do with the young industries argument only in showing how completely the domestic copper industry had passed the experimental stage to which this plea for protection is applicable.
The later development of copper production in the United States stands even further apart from any connection with the tariff, and hence maybe dismissed briefly. In the decade 1880-90 Montana became an important producer, and very shortly the greatest producer; the Anaconda mine being as conspicuous in this state as Calumet & Hecla was in Michigan. Here again there was economic exploit almost romantic in character: discoveries, risks (including Indian fights), bold investments, great fortunes. Before long a similar course of events set in at another far distant locality, in Arizona, where still further copper resources of vast extent were discovered and developed. They made certain the American command of the industry, and contributed their quota of American fortunes. And in recent years the remarkable development of porphyry mining in the southwest,—Arizona, Utah, Nevada,—has added another chapter of the same sort. There are economic problems in plenty through all this remarkable episode in economic history. As in Michigan, there were great risks, heavy investments, intricate questions of mine management and mine engineering, the dominance of forceful personalities,—conquests almost Napoleonic. Thus the same question of prizes and blanks arises. How far were private enterprise and the prospect of riches indispensable for industrial advance? Other problems are more peculiar to the later western episodes. The speculative character of copper mining led to product gambling and stock gambling, to dubious episodes like the flotation of the Amalgamated Copper Company. Looking over the long-run course of events, one finds a general, even though very irregular, response of supply to demand. The growth of electrical industries has caused an enormous increase in the demand for copper. To this on the whole the supply has responded; so that, notwithstanding occasional violent fluctuations, the trend of prices, if the occasional flare-ups be disregarded, has shown no such marked rise as might have been expected from the changed conditions of demand.
But all this serves to show once more that the main problems, interesting enough to the economist, lie outside the protective controversy. The only direction in which light could be got on the tariff question is in the possible applicability of the argument for aiding young industries. And here the result is simply negative. The case has only a sort of methodological significance. The fact that an industry has developed after protection was applied does not prove that it developed because protection was applied. The course of copper prices and copper production is just such as one would expect in an example of successful protection to a young industry; yet it is clear that in this instance the same results would have ensued if there had been no duties at all. The extraordinary richness of the natural resources; the prospect of fortunes in return for daring, persistence, able management; the achievements of American mining engineers,—these quite suffice to explain the great development which has taken place. It follows that one must be cautious in other cases also; in that of the iron and steel industry, for example, considered in the preceding chapter. To eliminate protection as a vera causa may not be so easy as in the case of copper. But the evidence must be scanned critically. Only in the rarest instances can the economist prove beyond cavil his conclusions on any concrete question of public policy. He must compare, weigh, discriminate, judge; and the need of discrimination could hardly be better illustrated than by this example from the copper tariff.
Notes for this chapter
I am indebted for the preparation of this chart to Mr. E. P. Coleman, Jr., who investigated the copper industry under my guidance while an undergraduate in Harvard College.
See p. 140, above.
See the vivid account of the enterprise in the Letters and Recollections of Alexander Agassiz, chapter iv. On the general significance of risk, especially in metalliferous mines, compare Einaudi, La Rendita Mineraria, § 13, pp. 47 seq., and Taussig, Principles of Economics, chapter xliv, ii, pp. 92 seq.
The following figures, giving in round numbers the production of copper, indicate what was the position of the Michigan mines in 1860-80. For comparison I have given figures for later years also. By 1890 Michigan had lost its dominant position among the copper producing districts; the discoveries in Montana and Arizona (to mention the chief) completely changed the situation.
End of Notes
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