Make Profits, Not War

Recently
by Gary North: Free
Trade: The Litmus Test of Economics

In a previous
article, “Tax-Loving
Conservatives,” I wrote about an invisible line down the middle
of your street. Jones lives on the other side. You live on your
side. Jones makes you an offer to sell something 10% cheaper than
Smith sells. Smith lives on your side of the street.

Smith gets
Brown and Green to impose a 25% sales tax on anything Jones offers
to sell to anyone on your side of the street. Then I analyzed this
arrangement in terms of who wins Â– Smith Â– and who loses:
you, Jones, Green, and Brown. You
can read this here.

I thought
the metaphor of the invisible line was clear. There is no invisible
economic line. There is only a judicial line. Judicial lines are
matters of guns and badges. People on one side of the line drive
in one direction. People on the other side drive in the opposite
direction. It is illegal to drive in the wrong direction on either
side. But, economically speaking, there is no line.

Similarly,
there is an invisible judicial line across the Rio Grande River.
There is also one along the coasts. There is one between Canada
and the United States. These have to do with residency and voting,
both of which have been made legal issues. These have to do with
“our money” and “your money.”

My point:
there is no economic line. The line exists as a judicial category,
not an economic category. It becomes an economic category only because
politicians turn these judicial lines into economic lines.

In the days
before the income tax, anyone could come into the United States.
There were no passports. Late in the 19th century, there was an
entry point at Ellis Island. Immigration bureaucrats blocked the
entry of sick people. This meant that immigration restrictions were
a public health issue. The authorities blocked out microscopic invaders
by blocking the people who carried them. But healthy people were
allowed to enter the nation. My great-grandfather arrived from England
this way. So did my Armenian father-in-law.

WAR
AND PASSPORTS

We forget
that the American passport was an imposition by two Presidents:
Woodrow Wilson and Franklin Roosevelt. Here
is the Wikipedia account.

From
1789 through late 1941, the government established under the Constitution
required passports of citizens only during the American Civil War
(1861-1865) and during and shortly after World War I (1914-1918).
The passport requirement of the Civil War era lacked statutory authority.
After the outbreak of World War I, passports were required by executive
order, though there was no statutory authority for the requirement.
The Travel Control Act of May 22, 1918 permitted the president,
when the United States was at war, to proclaim a passport requirement,
and a proclamation was issued on August 18, 1918. Though World War
I ended on November 11, 1918, the passport requirement lingered
until March 3, 1921.

The Wiki authors
were too polite to identify what happened on March 4. That was the
day that President Harding was inaugurated. I fixed the entry to
reflect this. I added: “On March 4, Warren G. Harding was inaugurated.”
We shall see how long this addition remains.

There
was an absence of a passport requirement under United States law
between 1921 and 1941. World War II (1939-1945) again led to passport
requirements under the Travel Control Act of 1918. A 1978 amendment
to the Immigration and Nationality Act of 1952 made it illegal to
enter or depart the United States without an issued passport even
in peacetime.

The contemporary
period of required passports for Americans under United States
law began on November 29, 1941.

The Wiki authors
were too polite to identify what happened next: Pearl Harbor (December
7). Gee, it looks as though President Roosevelt knew something big
was coming, military-wise. But I digress.

TARIFFS
AND IMMIGRATION

The 1924 immigration
act imposed quotas on immigrants. Why? Because of the income tax,
which had passed in 1913, according to the Attorney General, although
not the voters. (See the two-volume book, The
Law That Never Was.”) Similar restrictions were placed on
immigrants inside Europe.

World War
I and the income taxes that paid for it led to these restrictions.
When immigrants could become citizens and vote their way into other
Americans’ wallets, the barriers went up.

These barriers
did not come down until 1965, when Teddy Kennedy and Lyndon Johnson
figured out that Mexican immigrants’ children born inside the USA
would become voters and join the Democrats to help Democrats vote
money out of Republicans’ wallets two decades later. That was the
year that a new immigration law was passed.

That law was
a huge gift to Republican employers. It broke the labor union movement.
Immigrants worked cheaply in right-to-work states. Their products
could be exported North Â– no tariffs. Democrats don’t like
to remind their constituents of this fact. Republicans don’t, either.
It gives too much credit to the hated Teddy and LBJ. But Teddy and
LBJ gave the conservative movement its greatest domestic political
victory of the second half of the twentieth century: the roll-back
of trade unionism.

This was the
immigration side of the victory. The other side was President Kennedy’s
move to lower tariffs: the famous GATT tariff reductions. The Democrats
were the ramrods of reduced trade barriers. The flood of imported
goods broke the back of trade unionism, which had relied on government
intervention after 1935: the Wagner Act. America’s labor markets
were reclaimed from the Democrats of 1935. The Democrats did this.
The Republicans did not have the votes. In any case, the Republican
legacy had always been high tariffs, all the way back to Abraham
Lincoln.

WHO
WINS? WHO LOSES?

I did my best
to show that trade between people on “This Side” and “That Side”
should be a matter of free choice between individual traders.

One of my
subscribers asked these questions.

1)
If the person in “This Side” does not drop his price to compete
with the person on “that side” and people on “this side” bought
regularly from “that side” would there not, all other things being
equal and over time, be a transfer of wealth to “that side” from
“this side”? And, if that transfer of wealth were large enough would
that not eventually hurt “this side”, possibly making them subservient
to “that side” now that “that side” has more wealth and the abilities
that come with it? (presupposition is that depraved man will use
wealth to harm his neighbors and the corollary that wealth is a
form of defense). Maybe the assertion is invalid as long as venders
on “this side” will come down in price and compete with venders
on “that side”. But, the tariff would, at least, keep the wealth
on the same side of the street where, supposedly, you have more
in common (i.e. defense interest) than with those across the street.

2) What if the people on “that side” have a death wish for the people
of “this side” and they have a policy to use revenues generated
by sales to create ways to destroy “this side”?… would not “this
side” be wise to discourage trade with “that side”? This would be
anti-free trade, no doubt, but it seems rather insane to fund your
enemy… in this scenario it seems that the invisible lines might
make a difference?

I will do
my best to answer these questions. They all stem from an incorrect
understanding of voluntary exchange. These errors are the default
setting in most people’s thinking. Mercantilism and Hamiltonianism
rest on them. People think nationally in terms of “them vs. us.”
They think individually in terms of “Let’s make a deal.”

If
the person in “This Side” does not drop his price to compete with
the person on “that side” and people on “this side” bought regularly
from “that side” would there not, all other things being equal and
over time, be a transfer of wealth to “that side” from “this side”?

With what do people
on This Side buy the goods? Money. Where did they get the money? From
producing something.

So, people
buy a cheaper item from sellers on That Side. This leaves them with
more money in their pockets on This Side. They can now spend it
or invest it. They are not poorer than before the trade. They are
richer. They have the item they bought, plus the extra money.

There is a
transfer of wealth to the other side: money. There is also a transfer
of wealth from the other side: stuff.

The mercantilist
defines money as wealth, and stuff as . . . what? He never really
says. He just says it’s not as valuable as money.

David Hume
(1752) and Adam Smith (1776) argued against this. They said that
stuff is wealth, too. But the Hamiltonian mind set cannot fathom
this. The Hamiltonians want Americans to spend most of their money
on stuff manufactured by subsidized, inefficient producers on This
Side. So, they pass sales taxes on imported goods.

The fact is
this: if the stuff imported from abroad were not regarded as worth
more than the money exported to pay for it, no one on This Side
would buy from anyone on That Side. No one is in the charity business.
No one gives away something for nothing in business.

What of the
sales not made by the manufacturer on This Side, because there was
no bargain available on That Side? There was no money left over.
This question, the Hamiltonians prefer to ignore. That seller is
not a member of the cronies in the protected, inefficient firms.

Hamiltonians
subsidize domestic firms that cannot compete with foreign firms,
while starving out firms that can compete, but cannot survive when
the crony firms get the sales domestically. There is no extra money
left over after the trade.

NATIONAL
DEFENSE

This argument
is common. I have heard it for half a century.

And, if that
transfer of wealth were large enough would that not eventually hurt
“this side”, possibly making them subservient to “that side” now
that “that side” has more wealth and the abilities that come with
it? (presupposition is that depraved man will use wealth to harm
his neighbors and the corollary that wealth is a form of defense).
Maybe the assertion is invalid as long as venders on “this side”
will come down in price and compete with venders on “that side”.
But, the tariff would, at least, keep the wealth on the same side
of the street where, supposedly, you have more in common (i.e. defense
interest) than with those across the street.

This is the
old “national defense” argument. Here is the key fact. Military
defense is not a matter of voluntary exchange. It is a matter of
guns and uniforms and coercion. Once again, the argument invokes
guns.

Question:
Why should the government allow any trade with a foreign enemy,
if the issue is war? What has a 20% sales tax got to do with defending
the nation? I can see it now. In the middle of World War II, Roosevelt
proposes a 20% import tax on German and Japanese goods. Would that
have played in Peoria?

If this argument
holds up, then Congress should impose a 100% ban on trade. Tariffs?
You mean we should charge Americans an extra 20% or 30% because
the government on the other side of the line is going to nuke us?
Does this make sense?

This argument
sounds nutty. That’s why no one in Congress ever mentions it when
arguing for tariff increases. No one has ever invoked this argument
in public. But Hamiltonians use it, since they have no valid economic
arguments. They take whatever is available.

Now on to
#2.

What
if the people on “that side” have a death wish for the people of
“this side” and they have a policy to use revenues generated by
sales to create ways to destroy “this side”?… would not “this
side” be wise to discourage trade with “that side”? This would be
anti-free trade, no doubt, but it seems rather insane to fund your
enemy… in this scenario it seems that the invisible lines might
make a difference?

This is the
same argument. It is re-stated in new words.

Answer: what
has a 20% tariff got to do with defending the nation against defeat
and destruction?

In any case,
the U.S. government has done the opposite over the last 60 years.

SUBSIDIES
FOR EXPORTS

In 1961, it
authorized the Bryant Chucking Grinder company to sell to the
USSR the machines that alone made the unique ball bearings that
alone made possible MIRVed nuclear warheads.

What’s that?
They never told you this in high school? Gee, I wonder why not.
Here
is Antony Sutton’s account.

The
Bryant Chucking Grinder Company accepted a Soviet order for thirty-five
Centalign-B machines for processing miniature ball bearings. All
such precision ball bearings in the United States, used by the Department
of Defense for missile guidance systems, were processed on seventy-two
Bryant Centalign Model-B machines.

In 1961 the Department of Commerce approved export of thirty-five
such machines to the USSR, which would have given the Soviets capability
about equal to 50 percent of the U.S. capability.

The Soviets had no equipment for such mass production processing,
and neither the USSR nor any European manufacturer could manufacture
such equipment. A Department of Commerce statement that there were
other manufacturers was shown to be inaccurate. Commerce proposed
to give the Soviet Union an ability to use its higher-thrust rockets
with much greater accuracy and so pull ahead of the United States.
Subsequently, a congressional investigation yielded accurate information
not otherwise available to independent nongovernment researchers
and the general public.

Why was that
in the national interest? Because it made possible the multi-trillion-dollar
build-up of the military-industrial complex, 1961-91. When I say
“national interest,” I am referring to the national interest, according
to the military-industrial-congressional complex. Then, in 1972,
Congress approved export subsidies to the USSR to provide wheat.
The Soviets’ socialized agriculture had produced another of its
recurring mini-crops again. This subsidy for the USSR raised food
prices in the USA. But, because it was the policy of the U.S. Department
of Agriculture to subsidize agriculture and therefore keep food
prices high, this
was seen as consistent with American self-interest, as defined by
Congress.

CONCLUSION

The separation
of “This Side” from “That Side” exists because of politics. It becomes
an economic issue only because politics is allowed to intrude in
economic issues.

The popular
Hamiltonian argument for tariffs because of national defense makes
no sense. A 30% tariff on a country that intends to destroy you
will not play in Peoria. This is why it has never been invoked in
Congress. It’s just one more example of grasping at conceptual straws.

If anything,
free trade reduces the urge to go to war. It creates a domestic
constituency against going to war. “Make profits, not war!” “Sell
trinkets. Don’t die.”

June
14, 2012

Gary
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.