Regional Issues, 1815 to 1860

The Tariff. Tariffs are taxes assessed by the national government on imported goods, and they have two basic purposes. Revenue tariffs are relatively low import duties collected on all imports and are used to offset the expense of maintaining the necessary apparatus to control national ports and borders. Monitoring the inflow of people and goods into a nation can be expensive, and tariffs help offset the costs. Modest revenue tariffs are accepted as a necessary means of doing business internationally.

The second kind of tariff is the protective tariff, and it has a quite different purpose. Protective tariffs are duties laid on particular goods designed to help the manufacturers or producers of similar products in the host nation by artificially raising the price of foreign goods. Tariffs can be of a specified amount or ad valorem as a percentage of the product's value.

Obviously, goods that a nation does not produce in abundance will not be assigned protective duties. Products which foreign competition tends to render unprofitable are supposedly aided by high protective tariffs. The difficulty with protective tariffs is that they raise prices for domestic consumers. When levied on products that are produced regionally, they tend to favor one part of the country over another. Furthermore, they tend to generate retaliatory measures by other nations.

Under the Constitution Congress has the sole power to levy tariffs, a change from the Articles of Confederation, under which the states had the right to do that on their own. Early tariffs were designed primarily for revenue, although there was some moderate protectionism attached to them.

The Tariff Act of 1816 was enacted to protect American manufacturing against British postwar textile imports and promote national economic self-sufficiency. The Panic of 1819 encouraged high tariffs in order to protect American jobs, a factor which also tends to make tariffs attractive to consumers. Commercial interests of New England, for whom trade was often reduced by high tariffs, were not always in favor of the duties because of retaliation by trading partners. Further, high tariffs tended to reduce imports, which hurt merchants. For the most part, however, heavier duties were supported in every section of the country. In time, however, the South and Southwest turned against protective tariffs, concluding that they increased the costs of manufactured goods and inhibited the export of southern cotton. Manufacturing in the South was inhibited by the South's concentration on growing cotton.

Tariffs continued to rise in the 1820s as duties on manufactures, woolen goods, cotton, iron, and finished products continued to move upward. Because of the economic importance of the New England textile industry, that region supported protective tariffs on goods produced in the New England mills. In 1828 the highest tariff in the pre-Civil War period was passed. In the South it became known as the Tariff of Abominations, which led to the nullification crisis of 1832 (discussed below.) Following that crisis tariffs were gradually lowered (with intermittent rises) until the time of the Civil War.

Internal Improvements. Internal improvements is the name given to what we today call infrastructure building. The southern and western parts of the United States needed roads, canals and harbor facilities to get their goods to market. Most of the older sections of the country, the east and northeast, had already built those facilities at their own expense. The issue was how much federal money should be put into building projects that did not cross state lines. The states that needed large capital investment to improve transportation facilities often lacked the funds to support them and sought federal assistance. Westerners, for example, were most enthusiastic for federally financed internal improvements such as the National Road, which would connect them with eastern markets.38

Those regions which had already invested capital in internal improvements did not want to spend money on what they already had. For most part, during the early 19th century the federal government stayed out of the construction of internal improvements. In 1817 President Madison believed that a Constitutional amendment would be needed for the U. S. to get into building of improved roads or canals. John C. Calhoun supported federal expenditures for transportation under the notion of the "general welfare" clause and for military neces-

Sity. (Interestingly, President Eisenhower sold the idea of the interstate highway system in the 1950s on the basis of national security.) Although not a large issue, the question of internal improvements did sharpen regional differences.

Land Policy. The liberal land acts of 1800 and 1804 reduced the price of public land and the minimum size unit available for sale. Sales boomed, slumped during the War of 1812, then boomed again until 1818. Next agricultural prices fell as foreign markets shrank, and the Panic of 1819 destroyed many farms. The West strongly favored a cheap land policy while the North feared it would drain off cheap labor and provide less income for the federal government. The South worried about competition from cotton producers in the virgin lands of the Southwest.

Land was the most valuable asset that the federal government possessed, and selling it created a steady source of revenue. Liberal land policies also spurred development in the frontier regions and attracted immigrants. Understandably, people who wanted to go out west and settle favored cheap land that could be purchased on generous terms. Land speculators, who had no intention of settling on or developing the properties they owned, also wanted cheap land for selfish reasons. (There was no requirement for buyers to develop the land, as there would be in later land legislation.) Established interests, which tended to be concentrated in the East and Northeast, supported higher land prices to maximize profits for the government.

Despite the competing interests land sales boomed through much of the 19th century, and the income from land sales provided a major portion of the income needed to operate the federal government. For much of the 19th century the government operated very comfortably on the revenue from tariffs and land sales. In the later decades land sales and distribution would be used to finance the building of thousands of miles of railroads.

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The National Bank. Most Americans today probably see banks as convenient places to save money and secure loans for automobiles, homes or new businesses; they probably don't think much about the relationship between banking policy and the overall economy.4 What many Americans do pay attention to, however, is the cost of borrowing money. In other words, they pay attention to the interest rates that banks are charging for loans. The national banking system we have today is the Federal Reserve System, established in 1913. The Federal Reserve System with its twelve member banks controls the vast majority of the banks in the United States and determines basic interest rates. The interest rates that "the Fed" charges to member banks determine the interest rates that banks charge for home loans and so on.

The first Bank of the United States was created by Alexander Hamilton during the first Congress. It was chartered in 1791 for 20 years, but its charter was not renewed in 1811. Some who opposed the bank questioned its constitutionality; others opposed its competition with state banks and the fact that most of its stock was foreign owned. Absence of a national bank during the War of 1812, however, complicated war financing and lowered the value of bank notes. In response, Congress created a Second Bank of the United States in 1816, again chartered for 20 years. The new bank was badly ma-

43 The banking crisis of 2008 has substantially changed Americans' views of the financial sector.

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Naged at first and was associated with the Panic of 1819. New management and tighter credit policies saved the bank, but at the expense of public favor.

The national bank in the early 1800s did essentially the same thing that the Federal Reserve system does today: it determined the value of money. When there was no national bank, all banking was done by state banks. They issued paper banknotes based on their gold and silver deposits, which circulated as currency, and they made profits by loaning money. Absent strong controls on what the banks were allowed to do, many banks (sometimes known as "wildcat banks") loaned money indiscriminately in hopes of maximizing profits. They sometimes issued more paper banknotes than they could safely cover with their gold and silver reserves; for paper to have any value in that era, it had to be backed by hard money. (During the American Revolution, paper Continental dollars unbacked by specie were all but worthless.)

Speculators and people who wanted to buy land favored loose banking policies because money was easy to get. Since the value of money tended to go down as more and more notes were issued, the condition known as inflation, loans were relatively easy to repay. Furthermore, in an inflationary economy with rising prices, people who were obliged to borrow money in order to do business, such as farmers, favored inflation as it would drive up the prices they could get for their products and therefore their profits. Those competing interests tended to divide along sectional lines, as did the tariff and land policies.

Bankers, on the other hand, resisted inflation, for if they loaned money at 5% interest, but inflation proceeded at a 5% rate, the money they were paid back for loans was worth less than the money they had originally given to borrowers. The Bank of the United States controlled the value of currency by requiring state banks to redeem their own banknotes to the national bank in hard currency or specie when the national bank presented their notes for payment. Thus if speculators on the frontier borrowed money from a state bank, and used that money to pay the federal government for land, and that bank paper wound up in the possession of the national bank, then the national bank could demand payment in gold or silver.

That relationship between the National Bank and the state banks placed a brake on the propensity of state banks to lend beyond the capacity of their reserves to cover their paper, which in turn tended to hold down inflation. The presence of the national bank was therefore seen as a positive influence that helped maximize the profits of banking interests, while those who used banks for loans saw the national bank as harmful to their interests.

In 1815 President James Madison realized that the country was in a financial muddle; the United States had had to return $7 million in gold to England in 1811. Banking policy was confused, and the competing interests of debtors and creditors kept the nation in financial turmoil. Madison said that if state banks could not control currency, a national bank was necessary. Treasury Secretary Dallas introduced a new bank bill, which passed in 1816.

The Second Bank of the United States lasted until Andrew Jackson vetoed the bill to recharter it in 1832. Although the Second National Bank did well under the leadership of Nicholas Biddle, Jackson was not friendly to banks.