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Chapter Five

The Politics of Opportunistic Accommodation, 1912–1930

The United States departed dramatically from its historic policy of high tariff protection in the Underwood Act of 1913. Containing the lowest rates of duty of any tariff act between the Civil War and the late 1950s, and far lower than those of the Payne-Aldrich Act of 1909, the Underwood Act also explicitly endorsed the principle of reciprocal tariff reductions. Nine years later, in an international economy still unsettled by the war, the United States raised its duties moderately in the Fordney-McCumber Act of 1922. It compensated for this decline in liberalism by adopting a more active trade strategy and the unconditional most-fa-vored-nation principle. Contrary to the received wisdom on American tariff policy, and especially to the view of the Fordney-McCumber Act as simply a return to traditional Republican protectionism, this third phase of American trade strategy is characterized, I argue, by tariff restraint at home imposed by a fear of foreign retaliation. For the first time in American history, protection at home was compromised in favor of export expansion.

In the years immediately preceding World War I, the United Kingdom evolved from a hegemonic leader into an opportunist. This change in the international economic structure was primarily manifested in British domestic politics by a growing movement within the Conservative party for protection and imperial preferences. Having captured the party by 1912 and confident of winning the next election, the tariff reformers’ relative success signaled that Britain’s near century-old commitment to free trade at home and abroad could no longer be taken for granted.

This transformation of the international economic structure from hegemony into bilateral opportunism placed unprecedented constraints on American trade strategy in the years after 1912. Whereas the United States safely free rode on Britain’s hegemonic leadership in the past, it now had little choice but to accommodate the new mixed interests of its major trading partner. These new constraints, primarily manifested in domestic political discourse as a fear of foreign retaliation for continued protectionism, prompted the accommodative trade strategy adopted in 1913 and pursued until the late 1920s.

Although the fear of retaliation, rooted in the structure of bilateral opportunism, restrained American tariff levels throughout this phase, the trade strategy of the United States was also affected by the level of international economic instability. As Britain’s position gradually evolved within the international economic structure before World War I, the United States responded with the freer trade policy of the Underwood Act. The war, however, created significant political problems that were difficult to resolve. It also sharply disrupted century-old patterns of trade, money, and investment flows. All of these disruptions combined to create widespread international economic instability. As discussed in Chapter 1 and this chapter, instability increases the desires of opportunists for protection and decreases their willingness to cooperate. As expected, both Great Britain and the United States adopted higher but still restrained levels of protection following the war, and Anglo-American cooperation proved difficult.

Learning to Tango

The International Economic Structure

By 1912 the United Kingdom was no longer a hegemonic leader. Britain’s position within the international economic structure had been rapidly declining since approximately 1900. The United States surpassed Great Britain in relative productivity during the late 1890s, and the latter’s share of world trade fell from 17.5 percent in 1900 to 14.1 percent in 1913. As Britain’s position evolved, the structure of the international economy changed, just before World War I, from hegemony to bilateral opportunism.

Britain experienced a small but growing protectionist movement in the early twentieth century. Led by Colonial Secretary Joseph Chamberlain, the tariff reformers made two demands: imperial preferences, in which Britain would abandon the unconditional MFN principle for reciprocal tariff preferences with its colonies, and a 10 percent duty on manufactured imports. These measures were necessary, Chamberlain argued, because of Britain’s faltering trade position, which was largely the result of foreign tariffs designed to repel British goods. Tariff reform, according to Chamberlain, offered a way to prevent Britain from sliding into “decadence, impotence, and anarchy.”1 Britain’s economic self-defense, in other words, required a return to protection and an expansion of its special trade relations with the colonies.

Throughout the prewar era, the issue of tariff reform threatened to split the Conservative party, which contained large factions of both free traders and reformers. In 1903, recognizing that he did not enjoy the full support of the party and expecting Prime Minister Arthur Balfour to join the ranks of the reformers with time, Chamberlain resigned from the cabinet so he could propagandize more freely. Balfour simultaneously engineered the resignation of the most outspoken free traders in the cabinet. With party unity as his principal goal and having created room for maneuver, Balfour fashioned a compromise program by announcing his support for protection and preferences while denying that it was “practical politics” to seek such a change in policy in the near future.2 This compromise satisfied few. The party remained divided, and the Conservatives were voted out of office in 1906. Despite the growing strength of the tariff reformers, when the Payne-Aldrich Act was passed in the United States in 1909 Britain still appeared committed to free trade; even though protection was once again a contested political issue, the Conservatives were in opposition and the party was deeply divided.

While in opposition, Balfour could more easily side with Chamber-lain, which he did in part by asserting that the Liberal government needed to “broaden the base of taxation” if its ambitious military and social reform programs were to be adequately funded.3 Balfour continued to equivocate, searching for language that would signal his support for tariff reform without alienating the free traders. To the surprise of the Conservatives, the Liberals submitted and passed a “free-trade” budget in 1909, which made up the expected deficit through a highly progressive or graduated direct tax on income. The battle then moved to the more conservative House of Lords, which blocked the bill, precipitating a constitutional crisis by the unprecedented interference of the upper house in the passage of a revenue bill. In the elections that followed in January 1910, the Liberals retained control of the government, although the Conservatives increased the number of seats they controlled in the House of Commons. More important, the tariff reformers swept the Conservative Party, perhaps in part because of their financial and political backing of protectionists against standing free-trade members of their own party.4

Despite the expanded support for reform and his own increasingly protectionist views, Balfour continued to mediate between the two wings of the party. When a second election was called for December 1910, Balfour again searched for a compromise position on protection, announcing that if the Conservatives were elected any taxes on food imports—the basic building block of imperial preferences—would be submitted directly to the electorate for approval through a referendum. Perceived as simply postponing the day when preferences could be enacted, reformers opposed Balfour’s newest strategy. In December the Conservatives were defeated again. Under increasing criticism from tariff reformers for his equivocal leadership, and after having led his party to three defeats in five years, Balfour resigned early in 1912 and was replaced as party leader by Bonar Law.

Although he had supported Balfour on the referendum issue, Law “had always been one of the most enthusiastic supporters of the tariff reform policy,”5 and under his leadership the influence of the protectionists reached new heights. Throughout 1912, the Conservatives were increasingly confident that the government would fall and that they would be swept into power. Meanwhile, the party rallied around reform; although there was still disagreement between the “free fooders” and “wholehoggers,” as the two principal factions came to be known, virtually all members of the Conservative party backed protection in some form. At a nationwide party conference in November of that year, one “reliable authority” declared that there was “an ovation from the 12,000 delegates there assembled which has never … been rivaled. On what were they united? On Tariff Reform and effective Imperial Preference.”6 By 1912—even though the Conservatives remained a minority in Parliament—the overthrow of Britain’s near century-old policy of free trade appeared closer than ever before.

This rising protectionist sentiment among Britain’s political elite was clear evidence that the structure of the international economy had changed and, more directly, that the continued leadership of the former hegemonic power could no longer be taken for granted. Conservatives continued to espouse free trade in principle but argued that the protectionist policies of other countries necessitated that Britain arm itself for economic conflict and consolidate its imperial trading bloc. In other words, they rejected Britain’s traditional dominant strategy of free trade at home, through which countries such as the United States had successfully exploited London’s passivity. As a result, Britain’s trade preferences increasingly resembled a prisoner’s dilemma (see Figure 1.3), in which an unequivocal commitment to free trade would result in the “sucker’s payoff’ (FT/P)—an outcome preferred even less than universal protection (P/P).

The new position of the United Kingdom within the international economic structure posed a fundamental challenge to American trade policy. The proposed protective tariffs in the United Kingdom directly threatened American exports to its single most important market; although Britain’s share of American exports had been steadily declining since the early 1890s, the English market still accounted for 24.2 percent of all American exports in 1913.7 British protectionism also indirectly threatened American exports to other countries by delegitimating the policy of free trade; even after all the other major economic powers had turned to protectionism, Britain’s adherence to the policy of free trade lent credence to the sophisms of Smith, Ricardo, and other economists. The imperial preference policy, seen in Britain as a necessary complement to protection, threatened even greater consequences for the United States by signaling that Britain was abdicating its position of leadership within the international economy and turning inward upon its colonial trading bloc. The reciprocal advantages to be exchanged between the United Kingdom and its colonies threatened not only America’s access to the important British market but the ability of the United States to export to the various colonies as well. The net effect of Britain’s growing tariff reform movement was to undermine confidence in the nation’s commitment to free trade, thereby reducing the attractiveness of continued American free riding. The United States now had to consider the new, mixed trade interests of the United Kingdom in formulating its own trade strategy.

As in any prisoners’ dilemma, the United States and the United Kingdom could adopt either mutual free trade (cooperate) or mutual protection (defect), but they could not simultaneously realize their preferred strategies of protection at home and free trade abroad. Thus the United States faced an important choice. It could, on one hand, continue its policy of domestic protection, further alienate Britain, and risk losing its most important export market. This loss, if it were to occur, would affect a broad range of American exporters. The Conservatives’ proposed duty on manufactures would damage East Coast and Midwest industry, and imperial preferences would largely exclude American agricultural products from the British market and manufactures from the several colonial markets. Even though the Conservatives were not in power, this first option threatened high costs for the United States. On the other hand, the United States could reduce its domestic protection, thereby reinforcing the weakened position of British free traders, defusing the protectionists—who since Chamberlain had consistently maintained that foreign trade barriers were the source of the country’s trade problems—and facilitating the continued openness of its principal export market. Reducing tariffs in the United States would not be easy, of course, for it required a basic alteration in the entrenched “American system” of protection—an alteration that would bring the politically dominant protectionists and the national trade interest into direct and fundamental conflict for the first time. Yet, if coupled with a more active trade strategy directed at maintaining or expanding free trade abroad, reducing protection promised significant rewards.

The Underwood Act and American Trade Strategy

Tariff reform was nearly inevitable in 1913. As discussed in Chapter 4, the Payne-Aldrich Tariff was unpopular, despite the efforts of President William Howard Taft to build support for the measure. The tariff issue, as before, divided the Democrats and Republicans. It was also one of the first issues which divided Taft and his former supporter, Theodore Roosevelt, ultimately causing the latter to bolt from the Republican party in the 1912 election.8 Although it certainly aided him in the contest, Wilson did not owe his election to the Republican split. Wilson garnered 45.2 percent of the popular vote and 435 electoral college votes, to 29.7 percent and 88 votes for Roosevelt and 25.1 percent and 8 votes for Taft. If Roosevelt had not been in the race, many of his progressive supporters would likely have voted for Wilson, perhaps yielding him a smaller but nonetheless significant margin of victory. In addition, the Democrats captured both houses of Congress in 1912 for the first time since 1894, despite the absence of significant Progressive or “Bull Moose” party competition at this level. More important, in 1912 both Wilson and Roosevelt favored tariff reform. Together, they accounted for over 75 percent of the popular vote.

Despite their mutual criticisms of the Payne-Aldrich Act and calls for reform, however, Roosevelt and Wilson adhered to different programs. Reflecting his Republican background, Roosevelt continued to espouse a more paternalistic vision of government and sought to “get the tariff out of politics” through the creation of an independent Tariff Commission, which would scientifically determine import duties.9 Wilson dismissed the commission concept and was determined to push through Congress a new omnibus tariff bill that would embody the principles of the “New Freedom.”

The Underwood Tariff Act of 1913 was based on the principle of a “competitive tariff,” as articulated in the Democratic platform of 1912.10 In contrast to the “true principle of protection” of the Payne-Aldrich Act, which if taken to its logical conclusion would have prohibited all imports, a competitive tariff would allow, indeed encourage, the importation of foreign goods to compete with American producers. The concept of competition was critical: the tariff was not to be abolished or set so low as to damage an industry severely, but it was to be low enough to allow substantial importation.11 In fact, under the Underwood Act, imports were expected to increase by approximately $ 123 million, or 7.4 percent of all imports in 1912.12 It is important that, despite the reduction in the tariff, both Wilson and the Democrats as a whole specifically rejected the doctrine of free trade and desired to retain a modest degree of protection for American industry.

During the years that the Underwood Act was in effect, the average rates of duty were lower than in any period since at least the Civil War and lower than would be obtained until 1958.13 The tariff on dutiable goods was reduced from 41.0 percent in the Payne-Aldrich Act to 26.8 percent, and the average rate of duty on all imports was lowered from 20.0 to 8.8 percent (see Table 5.1). Correspondingly, the free list was increased from 51.3 to 67.5 percent of all imports. As the British magazine The Economist wrote, the Underwood bill is “the heaviest blow that has been aimed against the Protective system since the British legislation of Sir Robert Peel between 1842 and 1846.”14

Two mutually reinforcing issues were central to the Underwood tariff debate both within the country at large during the 1912 election campaign and in the government while the bill was under consideration.15 The congressional debate centered primarily on trusts. By sheltering the domestic market from imports, the protective tariff was thought to encourage the process of industrial concentration. Lower tariffs, which would provide new competition for the trusts within the American market, were intended, at least in part, to halt and, it was hoped, reverse this process. As a progressive candidate, Wilson campaigned hard on the trusts issue.

More important, Wilson emphasized the changing structure of the international economy and the need for the United States to adapt its policies accordingly. Wilson noted that the rapid economic development of the nation-state, through which the United States was outstripping the progress of its European rivals, had altered both the economic structure of the country and America’s interests within the global economy. This concern appeared in many of Wilson’s speeches on the tariff and was most clearly stated in his first message to Congress:

Similarly, early in the 1912 campaign, Wilson argued:

After the Spanish War was over we joined the company of nations for the first time… . Now we are getting very much interested in foreign markets, but the foreign markets are not particularly interested in us. We have not been very polite, we have not encouraged the intercourse with foreign markets that we might have encouraged, and have obstructed the influence of foreign competition. So these circumstances make the tariff question a new question, our internal arrangements and new combinations of business on one side and on the other our external necessities and the need to give scope to our energy which is now pent up and confined within our own borders.17

Sounding many of the themes first articulated by President Grover Cleveland in the late 1880s, Wilson also believed that America’s economic progress was even more constrained by the policy of protection in 1912 than in the past. In the campaign, Wilson argued that “if prosperity is not to be checked in this country we must broaden our borders and make conquest of the markets of the world. That is the reason why America is so deeply interested in … breaking down … that dam against which all the tides of our prosperity have banked up, that great dam which runs around all our coasts and which we call the protective tariff.”18

Finally, Wilson asserted that because of the changing nature of the international economy, the United States could no longer be a reclusive nation. American policies did affect other nation-states, he noted, and they could be expected to retaliate: “All trade is two-sided. You can’t sell everything and buy nothing. You can’t establish any commercial relationships that aren’t two-sided. And if America is to insist upon selling everything and buy nothing, she will find that the rest of the world stands very cold and indifferent to her enterprise.”19

Although Wilson did not single out growing British protectionism as the catalyst for his efforts at lowering duties or link lower American tariffs to the continuation of British free trade as the theory of international economic structures might lead us to expect, one theme consistently emerges from these speeches which is consonant with the constraints and opportunities of the structure of bilateral opportunism: the United States could no longer take the liberalness of others for granted, and it must lower its tariff to ensure continued openness by other countries. Accordingly, the lower duties of the Underwood Act were designed, in the words of Wilson’s congressional supporters, to free “the highways of trade” and take advantage of “our great national opportunities in the markets of the world.”20

The Democratic rationale for tariff reform in 1913 bears important similarities to the platform of the Cleveland Democrats articulated between 1887 and 1894, but it differs in two essential ways.21 First, the 1894 revision of the tariff was more restricted in scope. The Democrats sought only duty-free raw materials and obtained only free wool. This was a narrow trade strategy which attempted to increase exports by increasing the purchasing power of a few selected Latin American nation-states. In 1913, on the other hand, while recognizing the continued importance of duty-free raw materials, the Democrats obtained reductions across all tariff schedules and demonstrated the country’s ability and confidence to compete in the global market. Second, Wilson recognized that American policy did have an impact upon other nation-states and that it was no longer possible for the United States to assume that the international economy would remain open. In 1894, the Democrats de facto denied the impact of American policies upon others and specifically ignored a threat of retaliation against American exports by Germany.

The Underwood Act also sought to combine its liberalism with the activism of American trade strategy developed in the earlier phases. Section four of the final bill authorized the president to negotiate trade agreements “looking toward freer trade relations and further reciprocal expansion of trade and commerce,” without limiting the executive in the magnitude or breadth of the reduction in duty.22 Although this provision did not delegate any power to the president not already provided for in the Constitution, and its critics at the time argued that it was superfluous for this reason, it was significant in two ways. First, section four specified that both houses of Congress must approve the treaty but that neither could offer any amendments. Other countries might be more willing to enter into negotiations with the president, trade expansionists hoped, if Congress could not subsequently alter any agreement they might reach. Yet by specifically requiring the approval of both houses, Congress must have also realized that, considering its past unwillingness to accept reciprocity treaties, it was creating a high hurdle for any agreement to surmount. Second, by stating that the potential treaties should look toward “freer trade relations,” Congress created a presupposition toward lower duties. Although either house could still veto an agreement, the will of Congress was clearly defined in favor of reciprocal reductions of duty and freer trade. In this provision, the United States clearly identified its interests with greater openness in the international economy and expressed a willingness to lower its own tariff further to obtain reductions abroad.

In summary, the Underwood Act marks a significant shift in American trade strategy. Recognizing the changing nature of the international economy, the United States adopted a new and liberal trade strategy, subordinating its desires for protection at home to the dictates of export expansion abroad for the first time. In addition, through section four, although it was likely to be of only limited effectiveness, Congress supported the goal of freer trade within the international economy as a whole and expressed a willingness to work toward this end. In short, the United States accepted the constraints of bilateral opportunism and moved toward freer trade.

How successful this policy would have been remains unclear. In the year between the passage of the Underwood Act and the outbreak of the war, business opposition to the measure was mild. None of the catastrophic results predicted by the protectionists occurred and at least some portions of the business community appeared to recognize that they could continue to produce, indeed prosper, under severely reduced protection. In April 1914, even the protectionist Journal of Commerce noted that the steel industry had suffered no ill effects from the Underwood Act, with iron and steel imports for the first quarter of the year nearly 10 percent below those for the first four months of 1913.23 Given the evolutionary nature of the international economic structure and American trade strategy since 1887, it is reasonable to expect that, had the war not intervened, American policy would have continued along the same trajectory and the tendency toward freer trade at home would have been strengthened with time.

Whether or not America’s new, more liberal trade strategy helped moderate British protectionism is also unclear. Soon after Law rose to lead the Conservative party, the issue of home rule for Ireland re-emerged and displaced tariff reform as the principal cleavage in British politics.24 Before either issue could be resolved, however, war broke out, transforming the political agenda.

Wilson and the Domestic Policy Process

Woodrow Wilson, who employed several innovative political techniques to force congressional adherence to the Democratic party’s pledge of tariff reform, played a critical role in the successful passage of the Underwood Act. In the usual struggle between the foreign policy and representative elements of the state, Wilson was the key actor. Determined to be his own secretary of state, Wilson appointed William Jennings Bryan to the post only under significant pressure from the party to acknowledge the “Great Commoner’s” long years of service.25 In most areas of foreign affairs, Wilson instead relied heavily on Colonel Edward House, the self-described “power behind the throne.”26 Yet House did not take an active interest in the tariff, leaving Wilson to chart the course of his administration’s trade strategy almost single-handedly.

Soon after the November election, Chairman Oscar W. Underwood—one of Wilson’s principal rivals for the 1912 nomination—and the Democratic members of the House Ways and Means Committee began drafting a new tariff bill. The draft was completed before the inauguration, and Wilson saw it for the first time only after the committee had completed its deliberations. In an effort to make the measure more palatable to a wider cross-section of legislators, Underwood had backed away from the sweeping reform promised in the campaign. Wilson insisted that the committee hold firm and demanded in particular that the bill include free food, sugar, leather, and—at Bryan’s urging—wool. Although he threatened to veto the bill unless these goods were admitted free of duty, Wilson compromised on sugar, allowing the duty to be gradually eliminated over three years.27

When Democratic support wavered under these demands, Wilson soon thwarted it by three innovative moves. In a bold initiative, Wilson appeared before Congress to argue for the Underwood Act, both dramatizing the importance of the issue and building support for the proposed measure. Not since Thomas Jefferson had any president spoken before Congress. Although many critics deemed it inappropriate interference in legislative affairs, Wilson’s tactic was well received on the whole and facilitated passage of the bill.28

Then, in an attempt to create party discipline, the absence of which Wilson the scholar had decried as the principal weakness of the American political system, the president made support for the Underwood Act a test of party loyalty. Once the measure was approved by the House and Senate Democratic caucuses, Wilson insisted that individual members adhere to all of its provisions, even though they might disagree with individual duties in the bill. Wilson’s letter to Senator John Randolph Thornton (D.-La.)—one of only two Democratic senators who eventually voted against the bill—is similar to many others in this regard:

Undoubtedly, you should have felt yourself perfectly free in the caucus to make every effort to carry out the promises you had made to your own people, but when it comes to the final action, my own judgement is perfectly clear. No party can ever for any length of time control the Government or serve the people which can not command the allegiance of its own minority. I feel that there are times, after every argument has been given full consideration and men of equal public conscience have conferred together, when those who are overruled should accept the principle of party government and act with the colleagues through whom they expect to see the country best and most permanently well served.29

By making the tariff a party issue, Wilson alienated several progressive Republicans who might otherwise have supported the measure.30 Nonetheless, without strict party discipline, the bill might not have passed at all or only in a form unacceptable to Wilson.

Despite Wilson’s shrewd manipulation of the public arena and the party, senatorial support for the bill was by no means certain. In light of the large Democratic majority in the House, few lobbyists believed they could overturn the expected outcome. With only a six-vote majority in the Senate, however, the pressure groups hoped the traditionally more conservative and protectionist upper house would accede to their pleas for continued tariffs. When the bill reached the Senate, rumors—most likely stimulated by the lobbyists now descending on Washington—began to circulate on Capitol Hill that Wilson was willing to compromise on his earlier demands. To combat the influence of the lobby, Wilson initiated his third and perhaps most unusual tactic. Appealing to the public and his progressive supporters in particular, the president denounced the tariff lobby:

Wilson’s remarks were greeted skeptically at first. The New York Times noted that it was possible “the President has mistaken for lobbying the ordinary, usual, and perfectly legitimate measures taken by protected interests to present their case to Congress.” Expecting to reveal the president’s charges as groundless, the Republicans proposed hearings into the activities of the lobby, which were then expanded into an investigation of the financial holdings of senators themselves. Although few patently illegal activities were found, numerous conflicts of interest created by legislators holding stock or other interests in industries or firms seeking protection and considerable expenditures designed to influence public and legislative opinion were revealed.32 In the end, the president was more than vindicated. And under the light of public scrutiny, the usual logrolling was blocked. Indeed, the bill actually emerged from the Senate with lower duties than contained in the House version, an unprecedented event.

The differences between the Payne-Aldrich Act of 1909 and the Underwood Act are striking. In both, tariff reform was embraced, but the latter bill was far more ambitious. Interest-group theories do not appear to provide an adequate explanation of these differences. Although data are available only from the decennial census, there is no reason to believe that the structure of American producer groups changed significantly between 1909 and 1913 (see Table 2.1).

The contrasting results of 1909 and 1913 are also attributed by many to party politics: the Republicans were the party of protection and the Democrats the party of reform. Although consistent with the legislative results of 1909 and 1913, partisan competition fails to provide an adequate explanation of American trade strategy in a longer historical perspective. As I argue in Chapter 3, the McKinley Act of 1890 and the Wilson-Gorman Act of 1894, passed by the two opposing political parties, possessed more important similarities than differences. Conversely, the tariff acts of 1890, 1897, and 1909, all passed by Republicans, contained important differences in their provisions for export expansion. And similarly, the tariff rates of the Underwood Act were less than half those found in its Democratic predecessor, the Wilson-Gorman Act. Political-party competition cannot be dismissed as a factor in explaining the divergent policies adopted in 1909 and 1913, but it does appear to provide at best only a partial explanation.

Wilson’s success in realizing Democratic pledges of tariff reform also contrasts sharply with Taft’s failure to meet his more modest promises in 1909. This difference is often attributed to the two presidents’ leadership styles, which no doubt played a role in establishing the final outcome. Taft’s political ineptitude is easily documented, and Wilson’s advocacy of a strong president acting as leader of his party is displayed in both his academic writings and political practice. Like Blaine, Wilson effectively blocked the dominant protectionist coalition by appealing directly to the public and mobilizing his progressive supporters into the tariff-making process.

The differing leadership skills of the two presidents may have caused the change in American trade strategy between 1909 and 1913 to be more “choppy” or discontinuous than might be expected from a structural perspective, yet mere political acumen cannot explain the outcome without attention to the differing ends to which these skills were directed. Former President Theodore Roosevelt, the force behind the Payne-Aldrich revisions, could still write his friend and adviser Henry Cabot Lodge in 1909 that “there is no real ground for dissatisfaction, of a serious kind, with the [protectionist Dingley] tariff.”33 In 1913, however, Wilson placed reductions in the tariff at the center of his political reforms. As British trade preferences rapidly evolved in a more protectionist direction between 1909 and 1913, new constraints were placed on American trade strategy. The United States could no longer safely free ride and now had to accommodate Britain’s new mixed trade interests. As recognized by Wilson, and predicted by the theory developed in Chapter 1, the United States could best meet these changed circumstances by reducing its own tariff barriers.

The Disrupted Dance

The International Economic Structure

Britain’s trading position was permanently weakened by World War I, particularly as the United States stepped in to fill the void created in Latin America and the dominions when English producers were absorbed by the war economy,34 yet the international economic structure remained one of bilateral opportunism. At the most fundamental level, the choices facing both the United Kingdom and the United States after the war were essentially the same as in 1913. Each opportunist could either adopt or maintain protection at home, thereby risking retaliation by the other, or accept free trade in hopes of reinforcing a similar policy in its counterpart. As argued in Chapter 1, under conditions of relatively low economic instability and as long as each opportunist expects to interact with the other in the future, free trade is the maximizing and therefore preferred strategy. This prediction is supported by the freer-trade Underwood Act.

The greatest effect of the war, for our purposes here at least, was to destroy the international economic stability which had existed since the early twentieth century. Instability, of course, is partially a political phenomenon and is clearly affected by the policies of the leading countries. Yet the war itself was exogenous to the international economic structure (as defined here) and the single most important source of instability. It disrupted the international regimes in trade, money, and investment constructed over the previous century. It also raised a new set of contentious issues: war debts, reparations, German inflation, and—perhaps most important—America’s new position as a net creditor and the resulting challenge to British finance.35 These underlying political sources of instability were reflected in fluctuations in the exchange rate and prices (as measured by the trend-corrected equivalent of the coefficient of variation; see Table 5.2), which, in turn, are the principal determinants of the pattern of international trade. Even under the prewar gold standard, some variation in exchange rates occurred. Between 1919 and 1922 and in the absence of either the gold standard or fixed exchange rates, however, the fluctuations increased by more than a factor of 100. The same pattern is found in basic commodity prices, as reflected in price fluctuations for wheat delivered in Liverpool. Although the increase is smaller, price instability still grew by more than a factor of 10.

The theory developed in Chapter 1 can only predict the general direction of policy change resulting from increased instability within the international economy. Nonetheless, it helps identify two ways in which such instability conspired to raise the level of protection in the United States and the United Kingdom. Stability is a necessary prerequisite for an open international economy. All countries, opportunists included, seek to insulate themselves from international instability. Protection is one commonly used instrument for this purpose. Despite efforts by the United States and the United Kingdom to provide the necessary stability, they failed to regulate the international economy effectively or to pay the price of infrastructure. This failure was partly related to the second effect of instability. International instability, which makes future interactions less likely or predictable, increases the discount rate, or reduces the “shadow of the future,” and thereby decreases the incentives for opportunists to cooperate in the adoption of universal free trade. Under conditions of instability, opportunists will tend to value present returns more highly relative to future returns, increasing the temptation to defect or to adopt protection at home. Paradoxically, just as cooperation between the two opportunists becomes more essential in an unstable international economy, it also becomes more difficult.

Great Britain responded to the war and the instability it created by abandoning its century-old commitment to free trade and adopting both protection and a weak form of imperial preference. Britain imposed the “McKenna duties” in 1915, levied at 33.3 percent ad valorem on a variety of luxury items, including motor cars. These duties were primarily intended to reduce “unnecessary” foreign imports and economize on foreign exchange during the war. Yet because no internal excise taxes were levied on the domestic production of equivalent items, the McKenna duties also served to protect domestic manufacturers. The new duties were maintained after the war, except for a brief period between August 1924 and May 1925, when Labor controlled the government. In 1921, the system of protection was extended when approximately sixty-five hundred strategic products deemed essential for Britain’s defense were made dutiable at 33.3 percent in the Safeguarding of Industry Act. In conjunction with this return to protection, Britain also adopted an imperial preference system. In 1919, reductions of one-sixth and one-third of the duty were granted to empire countries on a variety of revenue-producing commodities and McKenna products respectively. Empire products were exempted entirely from the Safeguarding of Industry Act. This system of preferences, however, was of relatively little consequence because few of the goods covered by the McKenna or Safeguarding of Industry duties were produced within the empire. This weakness was partially ameliorated between 1923 and 1927 as additional food and raw material items were added to the list of preferential goods. Yet in 1928, goods entering Britain under the preferential rates still accounted for only 0.1 percent of total imports.36

Table 5.2. International economic instability, Phase III: Exchange rate and wheat price instability (monthly intervals), 1913 and 1919–1922*

these new duties were important to the United States as an indication that the United Kingdom had repudiated its commitment to free trade. They also served as a threat of further policy change in the future. Reed Smoot (R.-Utah), the second ranking majority member on the Senate Finance Committee, reflected the widespread uncertainty over future British policy during the 1922 tariff debate. “Does the Senator,” he asked rhetorically, “know how many of these safeguarding of industry acts have been passed in England since the armistice was signed?” Revealing his own misunderstanding of these duties, Smoot continued, “Why England has gone so far as to say that all her key industries, so designated by her legislators, shall be protected not by a rate, but by an embargo.” Finally, in concluding his remarks on Britain, Smoot declared that “never in the history of the world were conditions so unsettled as they are to-day.”38

The Fordney-McCumber Act and American Trade Strategy

With the instability created by the war and Britain’s return to protection, there was little doubt that the United States would raise its tariff as well. President Wilson vetoed a proposal to raise the tariff on agricultural products on his last day in office, but the measure was promptly passed again and signed into law by President Warren G. Harding as the Emergency Tariff Act of 1921. Immediately after the passage of this bill, Congress began work on a new omnibus tariff act, which was finally passed in September 1922.

In the Fordney-McCumber Act the level of duty on all imports was raised from 8.8 to 13.9 percent. Similarly, the average rate on dutiable imports was increased from 26.8 to 38.2 percent. Finally, the free list of the Fordney-McCumber Act was reduced from 67.5 to 63.5 percent. Although it is often claimed that the Republicans merely readopted the Payne-Aldrich Act of 1909, this was clearly not the case. In the previous Republican tariff the duty on all imports was 20.0 percent, more than 6 percent higher than the 1922 measure. Likewise, the Fordney-McCumber Act, described inaccurately by Frank W. Taussig as “a tariff with rates higher than any in the long series of protective measures,”39 appears moderate by comparison with tariff levels in the 1890s, when the average rates of duty were approximately 23.5 percent on all imports and 45.7 percent on dutiable imports.

The instability of the international economy clearly played a major role in the desire for a new higher tariff in the United States and was a continually recurring theme in the debates on the Fordney-McCumber bill. Both Joseph W. Fordney (R.-Mich.), chairman of the House Ways and Means Committee, and Porter J. McCumber (R.-N.D.), chairman of the Senate Finance Committee, opened the debates in their respective chambers by calling attention to the pervasive instability facing the United States. “Mr. President,” McCumber declared at the outset, “never before in times of peace have such difficult and such serious problems confronted the country, its industries, and its whole social fabric as those which challenge its attention to-day.” Of particular concern to the legislators were the drastically depreciated currencies of the European belligerents, which they feared would give America’s trade rivals an unfair advantage not only in foreign markets but in the United States as well. The solution to this condition of instability, McCumber argued, was to raise the tariff. “Of all times in the history of the country,” he stated, “this is the time in which a protective tariff is most needed to sustain our American industries and our millions of people dependent upon them.”40

Despite the desire of Congress to raise duties as a means of insulating the United States from the vagaries of the international economy, tariff rates continued to be constrained by America’s position within the structure of bilateral opportunism. Although aware of the desire to shield the country from external instability, President Harding argued that the United States could not adopt a reclusive trade policy in 1922 any more than it could in 1913. The country was too large and important a factor in the international economy to pursue such a strategy successfully. Sounding remarkably like his Democratic predecessor in 1913, Harding stated in his Inaugural Address, “We must understand that ties of trade bind nations in closest intimacy, and none may receive except as he gives… . Today, as never before, when people are seeking trade restoration and expansion, we must adjust our tariffs to the new order. We seek participation in the world’s exchanges… . We know full well we cannot sell where we do not buy.”41 Discussing the pending Fordney-McCumber Act during his Annual Message to Congress in 1921, Harding elaborated on this argument:

Again comes the reminder that we must not be unmindful of world conditions, that people are struggling for industrial rehabilitation and that we can not dwell in industrial and commercial exclusion and at the same time do the just thing in aiding world reconstruction and readjustment. We do not seek a selfish aloofness, and we could not profit by it, were it possible. We recognize the necessity of buying wherever we sell, and the permanence of trade lies in its acceptable exchanges. In our pursuit of markets we must give as well as receive.42

This recognition of the link between imports and exports was much less clear in Congress, yet it manifested itself as an ill-defined fear of retaliation. Retaliation was most commonly discussed through denials by the Republican congressional leadership that the proposed rates of duty in the Fordney-McCumber bill were so onerous as to warrant such a reaction,43 yet this fear clearly placed constraints on how high the tariff walls could be safely built. Thus, though the higher rates of the Fordney-McCumber Tariff were adopted as a response to increased international economic instability, the higher duties were nonetheless influenced and shaped by the constraints exerted by the structure of bilateral opportunism.

In addition to managing instability through a general increase in the tariff, a limited amount of administrative flexibility was also introduced into the Fordney-McCumber Act as a more direct mechanism of adjustment. Section 315 authorized the president to raise or lower all or any duties by up to 50 percent to equalize the costs of production. The Tariff Commission, created in 1916 under President Wilson, was charged with conducting the necessary investigations into production costs and recommending any changes the president might find necessary.44 The importance of this provision was recognized by many. Even Oscar Underwood, author of the Democratic Tariff Act of 1913 and now senator from Alabama, cited this section as the most important part of the bill.45

Section 315 was clearly intended to lead to a reduction in duties once international economic conditions were stabilized. Smoot, who introduced the provision, believed that there would be “ ‘many more occasions’ when the President would exercise his authority ‘in lowering rates than in increasing them,’ and if conditions became normal, he expected that the President would lower ‘the majority of rates.’ ”46 In practice, however, Section 315 was more often used to increase rates of duty as a result of the mandate for equalizing the costs of production. Between 1922 and 1929 more than 600 applications covering 375 items were filed with the Tariff Commission.47 Of these, only 47 investigations covering 55 items were completed, 38 of which resulted in a change of duty. Thirty-three of these changes increased and five decreased tariff rates.48 Over the course of the 1920s, many of Section 315’s original supporters became disillusioned with the flexibility concept and opposed a similar provision in the Smoot-Hawley Act of 1930 (see Chapter 6).49

Coupled with this moderately higher flexible tariff was an attempt by the United States to expand its exports through a more active trade policy. Central to this effort was Section 317 of the Fordney-McCumber Act, which authorized the president to retaliate against countries that discriminated against American goods, and the adoption of the unconditional form of the MFN principle by the United States in 1923.

The United States maintained its commitment to nondiscrimination in international trade throughout the war and the 1920s. In response to the European allies’ desire to organize the international economy around regional trading blocs as announced in Paris in 1916,50 President Wilson recommitted the United States to the principle of nondiscrimination. In the third of his fourteen points, Wilson set forth as an explicit goal of the United States “the removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all nations consenting to the peace and associating themselves for its maintenance.” Wilson carried this commitment to nondiscrimination into both the Treaty of Versailles and the League of Nations Charter.51

The principle of nondiscrimination continued to receive support from the Republicans after they took office in 1920. As Secretary of State Charles Evans Hughes stated, “We are not seeking special privileges anywhere at the expense of others. We wish to protect the just and equal rights of Americans everywhere in the world. We wish to maintain the equality of commercial opportunity; as we call it, the open door.”52 Section 317 of the Fordney-McCumber Act was designed to put this commitment to the open door into action.53 It empowered the president to impose penalty duties against “any empire, country, dominion, colony or protectorate” which “discriminates in fact against the United States.”54 Unlike the maximum-minimum provision of the Payne-Aldrich Act of 1909, Section 317 gave the president absolute discretion over the goods against which the penalty duties could be assessed and the magnitude of the penalty duties so long as they did not exceed 50 percent ad valorem. If after these sanctions the foreign country continued to discriminate against the United States, the president was further empowered to prohibit all imports from that country.

Section 317 is often interpreted as a congressional endorsement of the unconditional MFN principle. Although this principle follows logically from the section, the senators in charge of the provision clearly believed it was consonant with the conditional interpretation of the MFN principle which the United States had traditionally adhered to. In a colloquy between Senators McCumber and Henry Cabot Lodge (R.-Mass.), chairman of the Foreign Relations Committee, the latter noted that “reciprocal arrangements] never [have] been held, and can never be held, to be a violation of the favored-nation clause.”55

Section 317 did, however, evince a strong congressional commitment to the principle of nondiscrimination. In 1923, and without a specific congressional mandate, the president adopted the unconditional MFN principle as the basis for all United States commercial relations and abandoned its single remaining reciprocity agreement (except for those with Cuba, the Philippines, and the Panama Canal Zone, which it declared as exempt from this policy because of the close political and economic ties of these areas with the United States). It encouraged other nations to do likewise. Since 1904, the United States had, upon its request, received preferential treatment on several products in Brazil, the most important of which was wheat flour. In 1923, the United States declined to seek renewal of these preferences. Brazil accepted the American decision but asked why the United States had given up advantages it already possessed. In reply, the State Department noted that the unconditional MFN principle is “the policy best calculated to be of the maximum advantage in furthering relations of amity and commerce” and that Brazil would surely recognize “how inconsistent it would be for … the United States to enter into any arrangement involving … special customs treatment.”56

Whereas in the second phase of American trade strategy examined in Chapter 4, unconditional MFN had been inconsistent with the policy of continued domestic protection, and was rejected in favor of bilateral bargaining for that reason, it now accorded with the United States’s desire for freer trade abroad and willingness to accept limits on its protectionist policies at home. Between 1923 and 1929, the United States concluded twenty-two unconditional MFN treaties or agreements, including ones with Germany, Spain, and many of the small or newly independent European countries.57 Despite its efforts, the United States was unable to negotiate similar agreements with Great Britain or France.58 Even the successful agreements were not easily concluded in all cases. During talks with at least Spain, Romania, and Venezuela, the United States explicitly threatened to invoke the penalty duties provided for in Section 317 of the Fordney-McCumber Act. In each case, an agreement was reached and the threat was withdrawn.59

The United States also sought to gain broader support for the unconditional MFN principle through multilateral negotiations, the most important of which occurred at the World Economic Conference held in Geneva in 1927. There, at American insistence, the final declaration of the conference recognized the unconditional MFN principle as the most desirable basis on which to organize international trade, although few expected any results to follow from this effort.60

The United States was not entirely successful in its pursuit of non-discrimination abroad through a more active trade strategy. Although it obtained its goal in many cases, it was not influential enough to secure this result in all instances. Despite this only partial success, however, the United States did, contrary to the arguments of some scholars, try to lead other countries toward a more liberal trading regime during the 1920s.61 Its leadership was more limited in origin, scope, and purpose than that exercised by either the United Kingdom in the nineteenth century or the United States itself after World War II, but it was leadership.

The Harding Administration and the Domestic Policy Process

Warren G. Harding was an unlikely supporter of restrained protection, flexibility, and equality of treatment—the central principles of commercial policy which came to characterize his administration. Although he had been a lifelong advocate of protection, the president “made no pretense at being an expert on the tariff.”62 Regardless (or perhaps because) of his lack of knowledge, Harding’s high-tariff views earned him the support of the protectionist lobby, and he more than repaid his benefactors by declaring in the closing weeks of the presidential campaign his desire for upward tariff revision.63 Harding also backed the movement for the “American selling price,” a nationalistic appeal that would have substituted the price of equivalent domestic products for the exported price as the basis for calculating the ad valorem duty, thereby raising the real rate of protection while allowing tariffs themselves to drop or remain the same.64

Initially siding with the protectionists and later continuing to lend them his support, Harding gradually moved toward a more liberal position on trade policy during his first year in office. By late 1921, the president began to recognize the need to maintain import levels so as to promote exports and fell increasingly under the sway of his secretary of commerce, Herbert Hoover, a moderate protectionist and highly respected member of the cabinet.65 As with McKinley in 1897, holding the office of president altered the former protectionist’s views.

During this same period, William S. Culbertson of the Tariff Commission and Wallace M. McClure and Stanley K. Hornbeck of the State Department clearly and persuasively articulated the importance of flexibility and equality as principles of commercial policy. A moderate Republican protectionist appointed by Wilson to the Tariff Commission and later reappointed by Harding, Culbertson was the key figure in gaining support for these principles in both Congress and the administration. Culbertson emerged as the spokesman for this platform for two reasons. As Melvyn P. Leffler writes, “He successfully integrated prevailing ideas and developed a clear vision of the types of administrative machinery that might resolve the conflicting demands for protection and expansion and reconcile the divergent needs of the national and international economy.” More important, his colleagues in the State Department—wary of “interfering” in legislative affairs—believed that Culbertson, operating under the guise of the nonpartisan Tariff Commission, could obtain their shared goals more effectively.66

Having cultivated the friendship of the congressional delegation from his home state of Kansas, Culbertson used these contacts to gain access to the president and the Senate Finance Committee. As economic adviser for the Washington Disarmament Conference, Culbertson also developed cordial relations with Secretary of State Hughes, through whom he impressed his views on the secretary and urged him to do the same with the president.67 Culbertson’s efforts paid off: in his 1921 Annual Message to Congress (quoted above), Harding called for a moderate and flexible tariff; and Smoot proposed Sections 315 and 317, drafted by Culbertson, as committee amendments to the Fordney bill. Under the active lobbying of Culbertson and support of Harding and Hughes, Smoot’s amendments were adopted by the Senate and accepted by the conference committee, which struck the 1890s-style bilateral reciprocity provision included in the House version.

Harding had clearly called for moderation in raising the tariff rates, but the executive focused its attention on Sections 315 and 317 rather than on specific duties during the congressional deliberations on the Fordney-McCumber bill. This more narrow emphasis appears to have occurred for two reasons. First, lacking Wilson’s strong conception of presidential leadership, Harding and his subordinates accepted their weakness relative to the legislature and lobbyists in the setting of specific rates of duty.68 Whereas Wilson had charged into the tariff fray, the Harding administration followed Taft’s example and chose not to interfere. Second, regardless of the shape of the bill eventually enacted by Congress, flexibility held out the promise of subsequent presidential adjustment to remove whatever inequities remained. On this score, Harding followed McKinley’s 1897 example, preferring not to fight in Congress and hoping to rewrite unsatisfactory portions of the bill by executive action.

Having succeeded in enacting a tariff bill containing their suggestions, Culbertson and his colleagues at the State Department then turned their attention to the unconditional MFN principle. Although it was specifically disavowed in the Senate debate, Culbertson argued that unconditional MFN followed logically from Section 317. In light of the demand of the United States for equal treatment abroad, Culbertson wrote that “consistency … requires that we do not ourselves initiate discriminatory rates.” Conversely, he continued, “when all countries follow the unconditional [MFN] practice, equality of treatment is guaranteed generally and tendencies are set in motion contributing to commercial stability, simplicity and uniformity of rates, mutual confidence and international good will.” With support from Hughes, Culbertson’s arguments persuaded Harding, who subsequently endorsed the unconditional MFN principle. “I am well convinced,” Harding wrote, “that the adoption of the unconditional favored-nation policy is the simpler way to maintain our tariff policy in accordance with the recently enacted law and is probably the surer way of effectively extending our trade abroad.”69 This executive decision to abandon the conditional MFN principle was later validated by legislative ratification of treaties containing the new unconditional language—with one important reservation (see below).

The strategy of flexibility and equality adopted by the Harding administration, though promising to reconcile pressures for protection and incentives for moderation and export expansion, proved less successful than hoped. For reasons examined in the next section, the United States and the United Kingdom were unable to negotiate an unconditional MFN treaty. In addition, hopes of using the flexibility provision for lowering duties were undermined by early presidential appointments and the anomalous position of the Tariff Commission between the executive and legislature.

At the outset of his administration and in an attempt to maintain the support of Republican protectionists, Harding appointed three high-tariff advocates to the Tariff Commission: Thomas O. Marvin (chairman), secretary of the Boston Home Market Club and editor of the Protectionist; William Burgess, a lobbyist for the pottery industry; and, Henry M. Glassie, a Democrat with connections to the Louisiana sugar industry.70 Having “packed” the commission with protectionists, it subsequently recommended more increases in duty than decreases—to no one’s surprise.

Regardless of its personnel, however, the work of the Tariff Commission was hampered by the competing pressures placed upon it by the executive-legislative struggle for control over trade policy. Created by Congress following a recommendation by Wilson in 1916, the commission was designed as an independent “fact-finding” or investigatory agency “capable of looking at the whole economic situation of the country with a dispassionate and disinterested scrutiny.”71 Free to investigate a broad range of issues, the commission was charged with collecting and presenting data to Congress and the president for use in making trade policy. Its recommendations, however, were not binding on either.

Section 315 of the Fordney-McCumber Act expanded the duties of the Tariff Commission, making it the principal agent for investigating and recommending changes in the tariff. Yet, as a result of the battle for continued control over trade policy, the commission was rendered largely ineffective. Although Culbertson, Smoot, and others had convinced Congress of the need for a flexible tariff to respond to the international economic instability confronting the United States, the legislators were hesitant to yield their tariff-making prerogative to the president. Consequently, they placed a 50 percent ad valorem cap on all tariff changes and, more important, mandated that all duties should be set to equalize differences in the costs of production in the United States and the principal competing country.72 By seeking to limit the discretion of the president, Congress saddled the Tariff Commission with the unworkable formula central to the Payne-Aldrich Act of 1909, thereby limiting its ability to reach clear conclusions and allowing for multiple interpretations of any set of findings. Thus the distribution of power within the decentralized structure of the American state blocked the reform of the trade policy-making machinery and dashed any hopes of using flexibility either to rewrite the tariff once it was passed by Congress or to respond to changes in the unstable international economic environment.

Even though protectionists in Congress thwarted the use of flexibility to adjust the tariff, the Harding administration’s accomplishments were substantial. The increase in the tariff, though still larger than desired by many, was restrained by the fear of retaliation and a recognition that America’s national trade interest would be best served by openness abroad. The administration also adopted an active trade strategy designed to expand the number of countries adhering to the liberal principle of nondiscrimination. In both these areas and in the push for flexibility, the foreign policy executive of the Harding administration pursued a relatively coherent liberal and active trade strategy.

The postwar period lends partial support to both interest-group and political-party explanations of American trade strategy. Wilson’s veto and Harding’s support of the Emergency Tariff Act of 1921 highlight the differences between the two major parties on the tariff question. Yet, as argued above, in a longer historical perspective this explanation contains important anomalies, although it is supported in this case.

Joan Hoff Wilson and other interest-group theorists have argued that the trade strategy of the Harding administration was fundamentally confused and that this state arose from the political standoff between the nationalists, who received the higher duties they desired, and the internationalists, who obtained flexibility and unconditional MFN.73 Although this analysis of the Fordney-McCumber Act is persuasive, a comparison of the 1913 and 1922 tariffs fails to support it. As Table 2.1 indicates, American industry was far more export-dependent in 1919 than at any other time in the period covered by this study. Moreover, American industry and finance greatly expanded their overseas assets during the war, which should have further inclined the leading sectors of the American economy toward a more liberal policy. Only agriculture, which previously had been unsuccessful at realizing its interests, became more protectionist after the war. Yet in 1913 a less “internationalized” United States adopted a more liberal tariff than in 1922.

This interest-group explanation of the early 1920s also depends on a conception of American trade strategy as deeply at odds with itself, the product of too many ad hoc compromises demanded by competing groups. The analysis presented here, however, finds a greater coherency in American strategy. Seeking to insulate itself from increased international economic instability, the United States raised its tariff and compensated for this protectionist move by adopting a more active policy designed to maintain American exports. This strategy may have satisfied various groups within the United States, as all past strategies had done as well. But it is also consistent with the response of a relatively unified foreign policy executive to the constraints and opportunities of an international economic structure of bilateral opportunism beset by widespread economic instability.

This is not to deny that interest groups played an important role in the setting of American trade policy, only that they provide no more than a partial explanation of that outcome. As in 1909, protectionists in Congress thwarted the effective implementation of executive strategy. The high duties of the Payne-Aldrich Act hindered Taft’s ability to wield the weapon provided by the maximum-minimum schedules. Likewise, congressional mandates limited the effectiveness of the flexibility provisions of the Fordney-McCumber Act. Yet a focus on interest groups alone provides a distorted picture of American policy and ignores the very real strategic interests created by the structure of the international economy.

Anglo-American Cooperation in the 1920s

The rise, decline, and partial success of Anglo-American cooperation is central to an understanding of the international economy during the 1920s. It is also important for the theory developed in Chapter 1 and is of direct policy relevance today (see the Conclusion).

The postwar period was plagued, as I have argued, by severe international economic instability. As for a hegemonic power, the theory set forth in Chapter 1 hypothesizes that two or more opportunists will jointly seek to reduce instability and lead the international economy toward greater free trade. Success is not assured, however. Just as Britain failed to regulate the international economy effectively during the Great Depression of 1873–96, the success of joint Anglo-American attempts in the 1920s were not guaranteed. Indeed, given the magnitude of the disruption—the overnight rise of the United States as a net creditor, the wartime destruction of the European economies, the elimination of Germany as a central economic actor, the fracturing of historical trade patterns—successful regulation would have been highly unlikely under any circumstances. Nonetheless, significant and important Anglo-American cooperation did occur and the two opportunists met at least partial success.

Anglo-American cooperation underwent three phases in the postwar era.74 The first stage, immediately after the war, was a period of competition. The most divisive issue was Britain’s attempt to revive its prewar commercial network emanating from its financial services center in London. Threatened by America’s wartime inroads into the dominions and Latin America, the United Kingdom desired to integrate the United States into the British system, offering access to its well-developed information-gathering network in exchange for a promise that the United States would not create a global trading/financial system of its own. Although the American business community was far from unanimous on this issue, with the House of Morgan advocating collaboration with the British so as to dominate the system from within and the National City Bank seeking to construct its own network, Britain’s offer was finally rejected in favor of the development of a wholly American system.75

This competition reflects two different conceptions of the appropriate postwar international economic regime. The United Kingdom advocated a “closed-door” approach to reconstruction and trade wherein international exchange would be loosely governed by an international consortium. This was reflected in its recent adoption of imperial preferences. The United States, on the other hand, as the most productive country within the international economy and expecting to be the victor in any equal struggle for world markets, desired an “open-door” regime.76

After Britain had recovered from the immediate disruptions of the war and as a result of pressure placed by the United States on its fellow opportunist through government control over private lending to foreign countries,77 Great Britain acquiesced in the United States’s position on several key issues and considerable Anglo-American cooperation began to emerge. In this second stage, beginning in the early 1920s, cooperation was most evident in efforts to stabilize the international economy and preserve the open door in the developing regions. Between 1924 and 1926, the London Conference and the Dawes Plan temporarily settled the reparations issue, the Locarno Treaty helped stabilize the European political order by resolving several outstanding points of disagreement between France and Germany, and the Mellon-Berenger Agreement settled the war debt problem (again temporarily). In each of these cases, Anglo-American cooperation was central to the final outcome.

Believing they had resolved some of the key political issues dividing Europe, the United States and the United Kingdom then turned their attention toward stabilizing international exchange markets. The Dawes Plan funded Germany’s return to gold in 1924. Assistance from the Federal Reserve Bank of New York enabled Great Britain to stabilize its currency and resume convertibility into gold in 1925. Similar efforts facilitated France’s return to gold in 1927. Returning to gold, many believed, was the single most important means of alleviating the pervasive instability then confronting the international economy and plaguing relations between the opportunists.

In the trade and investment arenas, Anglo-American cooperation focused on the developing regions. In the Second China Consortium and the Washington Conference of 1921 and 1922, Britain and the United States joined together to restrain Japanese efforts to secure a “special” position in China. Under American pressure, Britain agreed to honor the open door in Middle East petroleum development. The United States, in turn, became willing to allow foreign participation in its domestic oil industry. Finally, the United Kingdom also accepted the open-door principle and American participation in the cable and communications systems it had previously developed in Latin America and elsewhere.78

During the third stage, from the mid-1920s to 1930, the loosely woven fabric of Anglo-American cooperation began to unravel. As Britain’s position in the international economic structure declined further, and in particular as the United Kingdom found it increasingly difficult to stabilize its overvalued pound and domestic economy while preserving London’s central position within the international financial network, new conflicts emerged that weakened the “Atlantic partnership” formed in the first half of the decade. Britain and the United States continued to cooperate in the maintenance of the open door in developing regions, but the two opportunists now came to differ on war debts—with a British attack on American policy sparking a brief but bitter debate, European recovery, and the limitations to be placed on armaments at the Geneva Naval Disarmament Conference in 1927.79

Despite their substantial cooperation in the early to mid-1920s, the United States and the United Kingdom never confronted the central problem of reducing protection between themselves in the postwar period. Each opportunist was individually aware of the dangers of retaliation and restrained its own tariff levels accordingly. But the two opportunists did not attempt to reduce their tariffs in a mutual or reciprocal manner. Indeed, the only explicit agreement reached between them was illiberal, when the United States agreed not to challenge Britain’s imperial preferences despite their contravention of the open door, perhaps because of its own preferences granted to the American “colonies” of Cuba, the Panama Canal Zone, and the Philippines.

The most important example of the lack of cooperation in bilateral trade relations was the failure of the United States and the United Kingdom to negotiate an unconditional MFN treaty. The war and its aftermath had increased America’s determination to create an independent shipping industry. Throughout the 1920s, this industry received both direct subsidies and protection. In the ratification of the unconditional MFN treaty with Germany, the Senate—despite considerable opposition from within the executive—attached a reservation granting the United States the right to exempt shipping from the terms of the treaty upon very short notice. It was recognized at the time that because of the importance of shipping to Great Britain, this reservation would most likely block the negotiation of a similar treaty between the two opportunists.80 Indeed, negotiations were never formally begun.81

Cooperation between two or more opportunists is paradoxical. Just when it becomes more essential, it is rendered more difficult. As instability increases, the present value of free riding relative to future cooperation also increases. This paradox colored all attempts at Anglo-American cooperation in the 1920s, resulting in what might be called “segmented cooperation.” The two opportunists cooperated most readily in stabilizing the international economy as a whole and maintaining openness in third parties. In these areas, their interests overlapped and did not directly conflict. Both opportunists could clearly gain. Cooperation on reducing barriers to trade between themselves proved more difficult. Here, each opportunist sought to free ride to a limited extent on the other.

Does this paradoxical situation indicate that closure within an international economic structure of bilateral opportunism is inevitable? Although openness is always problematic, its demise was by no means certain in the 1920s. The United States and the United Kingdom did engage in substantial cooperation designed to stabilize the international economy, thus mitigating some pressures threatening liberalism. Their failure to eliminate instability is not surprising in light of the magnitude of the disruption they faced. Although we cannot know for certain, their cooperative attempts might have been sufficient under conditions of lower instability. Additionally, Anglo-American cooperation was undermined in the late 1920 not by its own failure but by the continued decline of Britain within the international economic structure, as discussed in Chapter 6. Had the transformation of Great Britain from an opportunist into a spoiler not been imminent, limited or segmented Anglo-American cooperation might have persisted.


With the change in the international economic structure from hegemony to bilateral opportunism, the United States adopted a radically new trade strategy centering on lower tariffs at home and freer trade abroad. In the Underwood Act of 1913, domestic protection was compromised in favor of export expansion or free trade abroad for the first time. Although the international economic instability that followed World War I raised protection in both the United States and the United Kingdom, the same tension between protection and export expansion existed as in 1913. As a consequence, tariff increases were restrained for fear of retaliation abroad. Correspondingly, the United States adopted a more active trade strategy designed to alter the interests and behavior of other countries and, in particular, to gain general adherence to the unconditional MFN principle. Recommitting itself to the goal of nondiscrimination abroad, the United States finally adopted the instruments necessary to negotiate credibly with other nations to obtain this objective.

The United States had eagerly accepted a free ride on British hegemony during the first two phases examined here, but it now had little choice but to accommodate the interests of its fellow opportunist. Throughout these first three phases of American trade strategy, the trade preferences of the United States had not changed. Even after 1913, the United States still preferred protection at home and free trade abroad (P/FT), to universal free trade (FT/FT), which was preferred, in turn, to universal protection (P/P). Yet, immediately before the war its national trade interest changed dramatically toward freer trade as the international economic structure was transformed from hegemony to bilateral opportunism.

In both the Underwood and Fordney-McCumber acts, officials within the foreign policy executive were most clearly aware of the constraints and opportunities of the international economic structure. And although they did not receive everything they desired from the more protectionist Congress, these officials clearly initiated and forcefully advocated the change in policy designed to accommodate the new demands of bilateral opportunism. Recognizing the new international environment facing the United States and realizing that continued exports required freer trade at home, Wilson almost single-handedly pushed the Underwood Act through a resistant Congress. Although President Harding did not undertake a leadership role similar to Wilson’s and the resulting policy was more constrained by congressional protectionism, flexibility, unconditional MFN, and the restraints on tariff increases all clearly originated with and were promoted by foreign policy officials.

1Alan Sykes, Tariff Reform in British Politics, 1903–1913 (Oxford: Clarendon, 1979), pp. 56, 218.

2Ibid., p. 51.

3Hon. George Peel, The Tariff Reformers (London: Methuen, 1913), pp. 31–47.

4Herbert G. Williams, Through Tariffs to Prosperity (London: Philip Allan, 1931), p. 22.

5Ibid., p. 23; Sykes writes that Law was “associated with the most extreme elements of the tariff reform movement” (Tariff Reform, p. 253).

6Peel, Tariff Reformers, p. 165, quotation on p. 5; and Sykes Tariff Reform, p. 256.

7U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 (Washington, D.C.: U.S. Government Printing Office, 1975), ser. U317–334, pp. 930–34.

8On Taft, Roosevelt, and the tariff, see Judith Icke Anderson, William Howard Taft: An Intimate History (New York: Norton, 1981), pp. 212–24; and Donald F. Anderson, William Howard Taft: A Conservative’s Conception of the Presidency (Ithaca: Cornell University Press, 1973), p. 120.

9Henry F. Pringle, Theodore Roosevelt: A Biography (New York: Harcourt, Brace, 1931), p. 567.

10See Asher Isaacs, International Trade, Tariff and Commercial Policies (Chicago: Richard D. Irwin, 1948), p. 215.

11U.S. Congress, House of Representatives, Ways and Means Committee, A Bill to Reduce Tariff Duties, to Provide Revenue for the Government, and for Other Purposes: A Report to Accompany H.R. 3321, 63d Cong., 1st sess., 1913, pp. xvi-xvii.

12The figure of $123 million was often cited in the debates. See in particular the opening speech of F. M. Simmons, chairman of the Senate Finance Committee, Congressional Record, 63d Cong., 1st sess., 1913, p. 2552. Total imports for 1912 were $1,653.3 million (Statistical Abstract of the United States [Washington, D.C.: U.S. Government Printing Office, 1916], p. 328).

13Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office, selected years).

14Economist 76 (April 12, 1913): 867.

15Considerable debate also occurred over the role of the Democratic caucus in the tariffmaking process. At the root of this Republican disgruntlement lay the frustration of its party allies in the business community. Whereas in the past businessmen had faced a friendly Ways and Means Committee, they now confronted a committee committed to rolling back the favors these businessmen previously enjoyed.

Conversely, there was widespread acceptance, if not support, for the levying of a tax on incomes in the Underwood Act. On the relationship between the tariff and the institution of an income tax, see Ben Baack and Edward John Ray, “The Political Economy of the Origin and Development of the Federal Income Tax,” Research in Economic History, Suppl. 4 (1985), pp. 121–38; and Baack and Ray, “Special Interests and the Adoption of the Income Tax in the United States,” Journal of Economic History 45 (September 1985): 607—25-

16Arthur S. Link, ed., The Papers of Woodrow Wilson, 56 vols. (Princeton: Princeton University Press, 1966—), 27:270, hereafter cited as WWP.

17WWP, 23:641–42.

18WWP, 25:38.

19WWP, 25:341.

20Congressional Record, 63d Cong., 1st sess., 1913, pp. 662, 2553.

21The failure of the reform effort in 1894 is often attributed to the slim Democratic majority in the Senate, whereby all the senators on that side of the aisle had to be appeased in order to muster sufficient votes to pass the measure. See Tom E. Terrill, The Tariff, Politics, and American Foreign Policy, 1874–1901 (Westport, Conn.: Greenwood, 1973), pp. 192–93. The Democratic majority in the Senate was also small in 1913, but the logrolling was restrained. See below, and Sidney Ratner, The Tariff in American History (New York: Van Nostrand, 1972), pp. 44–45.

22U.S. Congress, House, Ways and Means Committee, Bill to Reduce Tariff Duties, p. 89.

23Melvin I. Urofsky, Big Steel and the Wilson Administration: A Study in Business-Government Relations (Columbus: Ohio University Press, 1969), p. 50; and Robert H. Wiebe, Business and Reform: A Study of the Progressive Movement (Cambridge: Harvard University Press, 1962), p. 142.

24Williams, Through Tariffs to Prosperity, p. 24.

25Wayne C. Williams, William Jennings Bryan (New York: Putnam’s, 1936), p. 336.

26Charles Seymour, arr., The Intimate Papers of Colonel House, 2 vols. (Boston: Houghton Mifflin, 1926), 1:243.

27Arthur S. Link, Wilson: The New Freedom (Princeton: Princeton University Press, 1956), p. 180.

28Arthur S. Link, Woodrow Wilson and the Progressive Era, 1910–1917 (New York: Harper, 1954), pp. 35–36.

29WWP, 28:35.

30Link, Wilson: The New Freedom, p. 185.

31Quoted in Richard Hofstader, ed., The Progressive Movement, 1900–1915 (Englewood Cliffs, N.J.: Prentice-Hall, 1963), pp. 156–57.

32Quoted in Link, Wilson: The New Freedom, p. 187, also pp. 189–90.

33Selections from the Correspondence of Theodore Roosevelt and Henry Cabot Lodge, 2 vols. (New York: Charles Scribner’s Sons, 1925), 2:335.

34In 1913, for instance, 63 percent of Indian imports came from Great Britain. By 1918 this had fallen to 54 percent, and by 1920 to 46 percent. During the same period, America’s share of the Indian market rose from 3 to 10 percent. The same pattern occurred in Australia. In 1913, 63 percent of Australian imports originated in Britain, but only 48 percent did so in 1918. America’s share, on the other hand, increased from 11 to 27 percent (O. Delle Donne, European Tariff Policies since the World War [New York: Adelphi, 1928], p. 132, n. 50).

35For a discussion of the immediate postwar period, see Carl P. Parrini, Heir to Empire: United States Economic Diplomacy, 1916–1923 (Pittsburgh: University of Pittsburgh Press, 1969), esp. pp. 40–7

36On Britain’s postwar protectionism, see Williams, Through Tariffs to Prosperity; Donne, European Tariff Policies, esp. p. 138 for the 1928 figure; National Institute of Economic and Social Research, Trade Regulations and Commercial Policy of the United Kingdom (Cambridge: Cambridge University Press, 1943); Deryck Abel, A History of British Tariffs, 1923–1942 (London: Heath Cranton, 1945); and Forrest Capie, Depression and Protectionism: Britain between the Wars (London: Allen 8c Unwin, 1983).

37Estimates of the average rate of British protection during the 1920s vary widely. Frederick E. Kip, in a report prepared for Senator McCumber, chairman of the Senate Finance Committee and introduced into the Congressional Record, estimated that the British tariff was approximately 15 percent in 1920. This figure is clearly too high, especially since the Safeguarding of Industry Act was not yet passed at the time the calculations were made. Yet this estimate was the only substantive information provided on tariff policies abroad during the Fordney-McCumber debates and it was not challenged by other members of Congress.

38Congressional Record, 67th Cong., 2d sess., 1922, pp. 6055–56.

39Frank W. Taussig, The Tariff History of the United States, 8th ed. (New York: Putnam’s, p. 453.

40Congressional Record, 67th Cong., 2d sess., 1922, p. 5763. See also Fordney’s remarks, ibid., 1st sess., 1921, pp. 3476–78.

41Inaugural Addresses of the Presidents of the United States from George Washington 1789 to Richard Nixon 1969 (Washington, D.C.: U.S. Government Printing Office, 1969), pp. 209–13.

42Foreign Relations of the United States, 1921, 2 vols. (Washington, D.C.: U.S. Government Printing Office, 1936), 1: xxiv-xxv.

43See Fordney’s remarks, Congressional Record, 67th Cong., 1st sess., 1921, p. 3477; and those of William M. Calder (R.-N.Y.), ibid., 2d sess., 1922, p. 11262.

44For a brief history of the origins and early years of the Tariff Commission, see John M. Dobson, Two Centuries of Tariffs: The Background and Emergence of the U.S. International Trade Commission (Washington, D.C.: U.S. Government Printing Office, 1976), pp. 83–93.

45Congressional Record, 67th Cong., 2d sess., 1922, p. 11205.

46William B. Kelly, Jr., “Antecedents of Present Commercial Policy, 1924–1939,” in Kelly, ed., Studies in United States Commercial Policy (Chapel Hill: University of North Carolina Press, 1963), p. 16.

47See Dobson, Two Centuries of Tariffs, pp. 83–93; and J. R. Snyder, “Coolidge, Costigan and the Tariff Commission,” Mid-America 50 (April 1968): 131–48.

48Kelly, “Antecedents of Present Commercial Policy,” pp. 18–22.

49Joan Hoff Wilson, American Business and Foreign Policy, 1920–1933 (Boston: Beacon, 1971), p. 86.

50Parrini, Heir to Empire, p. 16.

51Quoted in Wallace McClure, “A New Commercial Policy: As Evidence by Section 317 of the Tariff Act of 1922,” Columbia University Studies in History, Economics and Public Law 114 (1924): 261, see also pp. 262–67; and Melvyn P. Leffler, The Elusive Quest: America’s Pursuit of European Stability and French Security, 1919–1933 (Chapel Hill: University of North Carolina Press, 1979), pp. 3–39.

52Quoted in James W. Gantenbein, The Evolution of Our Latin-American Policy: A Documentary Record (New York: Oxford University Press, 1950), p. 108.

53The United States also employed other nontrade instruments to obtain the open door, including loans and war debts. See Wilson, American Business and Foreign Policy, pp. 104 and 118; and Michael J. Hogan, Informal Entente: The Private Structure of Cooperation in Anglo-American Economic Diplomacy, 1918–1929 (Columbia: University of Missouri Press, 1977), p. 28.

54U.S. Congress, House of Representatives, The Tariff Act of 1922 (with Index), 67th Cong., 2d sess., 1922, House Doc. 393, pp. 97–98.

55Quoted in Kelly, “Antecedents of Present Commercial Policy,” p. 41.

56Foreign Relations of the United States, 1923, 2 vols. (Washington, D.C.: U.S. Government Printing Office, 1938), 1:124–25.

57Unconditional MFN treaties were reached with Germany (1923), Hungary (1925), Estonia (1925), Salvador (1926), and Honduras (1927). Other treaties containing unconditional MFN clauses were reached with Turkey (1923) and Panama (1926). Finally, modus vivendi recognizing the unconditional MFN principle were obtained with Albania (1923), Brazil (1923), Dominican Republic (1924), Greece (1924), Guatemala (1924), Nicaragua (1924), Poland (1925), Lithuania (1925), Finland (1925), Romania (1926), Haiti (1926), and Latvia (1926).

58Franco-American trade relations were acrimonious throughout the decade of the 1920s. France often accused America’s high tariffs of being one of the most important sources of international economic instability. The United States responded that its imports were growing faster than its exports and that, in actuality, the discriminatory tariff practices of countries such as France were the key impediments to international trade.

After the war, France had abandoned the unconditional MFN principle in favor of the conditional variant. In July 1919 it sanctioned tariff rates, to be set through negotiation, between its maximum and minimum schedules, thus creating “a dozen schedules instead of two.” France raised all tariffs by 30 percent on an emergency basis in April 1926 and by a second 30 percent five months later. In August 1927 it granted Germany de facto MFN status. One month later, France raised its minimum tariff; set its maximum tariff approximately 400 percent above the minimum rate; placed many American goods—which had previously entered under France’s intermediate rates—on the maximum schedule; and, noting its adherence to only the conditional MFN principle, demanded considerable concessions on its exports in return for a less harsh treatment of American products. The United States replied that under its current tariff laws it was not able to offer special concessions but that if France continued upon its present course it would not be possible for the United States to “avoid using Section 317 and increasing the rates against French goods.” As tension escalated and a tariff war appeared imminent, the United States and France concluded a modus vivendi by which the former agreed to begin investigations of the duties on French exports under Section 315 (the flexibility provision) of the Fordney-McCumber Tariff, while the latter, in return, would levy duties on American goods no higher than those existing in August 1927 before the conflict began, except if the new minimum duties were higher, in which case they would take precedence. See Foreign Relations of the United States, 1927, 3 vols. (Washington, D.C.: U.S. Government Printing Office, 1942), 2: 472–73 and 693–703. The quotation is on p. 473.

59For negotiations with Spain, see Foreign Relations of the United States, 1923, 2:849–50; for negotiations with Romania and Venezuela, see Foreign Relations of the United States, 1927, 3:635 and 822, respectively.

60League of Nations, The World Economic Conference: Final Report (Geneva, 1927); Par-rini, Heir to Empire, pp. 270–71 and 274–75.

61Charles P. Kindleberger, The World of Depression, 1929–1939 (Berkeley: University of California Press, 1973).

62Robert K. Murray, The Harding Era: Warren G. Harding and His Administration (Minneapolis: University of Minnesota Press, 1969), p. 206.

63Harding’s hotel bill at the 1920 Republican National Convention was paid by the American Protective Tariff League. See Randolph C. Downes, The Rise of Warren Gamaliel Harding, 1863–1920 (Columbus: Ohio State University Press, 1970), p. 661.

64Murray, Harding Era, p. 273.

65See ibid.

66Leffler, Elusive Quest, pp. 48–49.

67Ibid., p. 47.

68Ibid., p. 49.

69Foreign Relations of the United States, 7925, 1:124–25, 129.

70Murray, Harding Era, p. 392.

71Dobson, Two Centuries of Tariffs, p. 87.

72Ibid., p. 94.

73Wilson, American Business and Foreign Policy, pp. 65–100; and Jeff Frieden, “Sectoral Conflict and U.S. Foreign Economic Policy, 1914–1940,” International Organization 42 (Winter 1988).

74Considerable cooperation occurred between the United States and the United Kingdom outside the trade area. See Parrini, Heir to Empire, and Leffler, Elusive Quest, for a general discussion of Anglo-American efforts in the areas of general political and financial stabilization.

75Parrini, Heir to Empire, pp. 40–71.

76Ibid., p. 142.

77Ibid., pp. 171–211.

78Hogan, Informal Entente, pp. 84–96, 105–85; and Wilson, American Business and Foreign Policy, pp. 184–218. Both Hogan and Wilson note that Anglo-American cooperation often took the form of bilateral monopoly rather than a strict adherence to the open-door principle.

79Hogan, Informal Entente, p. 218.

80See Parrini, Heir to Empire, pp. 242–43; and Foreign Relations of the United States, 1924, 2 vols. (Washington, D.C.: U.S. Government Printing Office, 1939), 2:188–89.

81No correspondence or internal memorandum appears in the Foreign Relations of the United States series indicating that negotiations had taken place.

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