Report on Manufactures

INTRODUCTION In his first annual message, delivered on January 8, 1790, President George Washington expressed a desire to promote manufacturing, to import "new and useful inventions," and to stimulate "the exertions of skill and genius in producing them at home." As a result, the House of Representatives instructed Alexander Hamilton to prepare a report on the promotion of manufactures that would "tend to render the United States independent of other nations for essential . . . supplies." In 1790 U.S. manufacturing was primitive for the most part. In his Report on Manufactures (1791) Hamilton estimated that between two-thirds and four-fifths of the nation's clothing was homemade. He discussed how each of the interconnected parts of the Federalist program promoted manufacturing and how nations benefit from manufacturing. His discussion is in terms of factories, machines, and large-scale production, and it considers the handicaps faced by such industries in the United States, especially the scarcity of labor and capital.

Hamilton believed that the U.S. manufacturing deficit was attributable to a lack of machinery and scientific apparatus, which would have to be imported, and that a nation producing only agricultural surpluses for export was dependent on foreign outlets, had an unfavorable balance of trade, and suffered from a shortage of specie. The Report focused on twenty-eight industries that had advanced sufficiently to justify public aid and protection and considered eleven types of assistance, assigning special value to protective tariffs, bounties, patents, and inland transportation facilities. The excerpt below deals with tariffs and bounties. Although Hamilton does not clearly formulate it, his rationale for protection is consistent with the well-known infant-industry argument, which holds that a new ("infant") industry requires protection in its early stages if it is to survive and successfully compete against other countries' more mature industries. Presumably, once the infant matures, protection will no longer be needed. ∎

THE SECRETARY OF THE TREASURY, in obedience to the order of the House of Representatives, of the 15th day of January, 1790, has applied his attention at as early a period as his other duties would permit, to the subject of Manufactures, and particularly to the means of promoting such as will tend to render the United States independent on foreign nations, for military and other essential supplies; and he thereupon respectfully submits the following report. . . .

The expediency of encouraging manufactures in the United States, which was not long since deemed very questionable, appears at this time to be pretty generally admitted. . . .

There seems to be a moral certainty that the trade of a country, which is both manufacturing and agricultural, will be more lucrative and prosperous than that of a country which is merely agricultural. . . . There is always a higher probability of a favorable balance of trade, in regard to countries in which manufactures, founded on the basis of a thriving agriculture, flourish, than in regard to those which are confined wholly, or almost wholly, to agriculture. . . .

Not only the wealth, but the independence and security of a country, appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself, all the essentials of a national supply. These comprise the means of subsistence, habitation, clothing, and defence. . . .

In order to a better judgment of the means proper to be resorted to by the United States, it will be of use to advert to those which have been employed with success in other countries. The principal of these are—

I. Protecting duties

Protecting duties—or duties on those foreign articles which are the rivals of the domestic ones, intended to be encouraged.

Duties of this nature evidently amount to a virtual bounty on the domestic fabrics since by enhancing the charges on foreign articles, they enable the national manufacturers to undersell all their foreign competitors. The propriety of this species of encouragement need not be dwelt upon; as it is not only a clear result from the numerous topics which have been suggested, but is sanctioned by the laws of the United States in a variety of instances; it has the additional recommendation of being a resource of reevenue. Indeed all the duties imposed on imported articles, though with an exclusive view to revenue, have the effect in contemplation, and except where they fall on raw materials wear a beneficent aspect towards the manufactures of the country.

II. Prohibitions of rival articles or duties equivalent to prohibitions

This is another and an efficacious mean of encouraging national manufactures, but in general it is only fit to be employed when a manufacture, has made such a progress and is in so many hands as to insure a due competition, and an adequate supply on reasonable terms. Of duties equivalent to prohibitions, there are examples in the Laws of the United Staets, and there are other cases to which the principle may be advantageously extended, but they are not numerous.

Considering a monopoly of the domestic market to its own manufacturers as the reigning policy of manufacturing nations, a similar policy on the part of the United States in every proper instance, is dictated, it might almost be said, by the principles of distributive justice; certainly by the duty of endeavoring to secure to their own citizens a reciprocity of advantages.

III. Prohibitions of the exportation of the materials of manufactures

The desire of securing a cheap and plentiful supply for the national workmen, and, where the article is either peculiar to the country, or of peculiar quality there, the jealousy of enabling foreign workmen to rival those of the nation, with its own materials, are the leading motives to this species of regulation. It ought not to be affirmed, that it is in no instance proper, but it is certainly one which ought to be adopted with great circumspection and only in very plain cases. It is seen at once, that its immediate operation, is to abridge the demand and keep down the price of the produce of some other branch of industry, generally speaking, of agriculture, to the prejudice of those, who carry it on; and though if it be really essential to the prosperity of any very important national manufacture, it may happen that those who are injured in the first instance, may be eventually indemnified, by the superior steadiness of an extensive domestic market, depending on that prosperity: yet in a matter, in which there is so much room for nice and difficult combinations, in which such opposite considerations combat each other, prudence seems to dictate, that the expedient in question, ought to be indulged with a sparing hand.

IV. Pecuniary bounties

This has been found one of the most efficacious means of encouraging manufactures, and it is in some views, the best. Though it has not yet been practiced upon by the government of the United States (unless the allowances on the exportation of dried and pickled fish and salted meat could be considered as a bounty) and though it is less favored by public opinion than some other modes.

Its advantages, are these—

It is a species of encouragement more positive and direct than any other, and for that very reason, has a more immediate tendency to stimulate and uphold new enterprises, increasing the chances of profit, and diminishing the risks of loss, in the first attempts.

It avoids the inconvenience of a temporary augmentation of price, which is incident to some other modes, or it produces it to a less degree; either by making no addition to the charges on the rival foreign article, as in the case of protecting duties, or by making a smaller addition. The first happens when the fund for the bounty is derived from a different object (which may or may not increase the price of some other article, according to the nature of that object) the second, when the fund is derived from the same or a similar object of foreign manufacture. One percent duty on the foreign article converted into a bounty on the domestic, will have an equal effect with a duty of two percent, exclusive of such bounty; and the price of the foreign commodity is liable to be raised, in the one case, in the proportion of one percent; in the other, in that of two percent. Indeed the bounty when drawn from another source is calculated to promote a reduction of price, because without laying any new charge on the foreign article, it serves to introduce a competition with it, and to increase the total quantity of the article in the market.

Bounties have not like high protecting duties, a tendency to produce scarcity. An increase of price is not always the immediate, though, where the progress of a domestic manufacture does not counteract a rise, it is commonly the ultimate effect of an additional duty. In the interval, between the laying of the duty and a proportional increase of price, it may discourage importation, by intefering with the profits to be expected from the sale of the article.

Bounties are sometimes not only the best, but the only proper expedient, for uniting the encouragement of a new object of agriculture, with that of a new object of manufacture. It is the interest of the farmer to have the production of the raw material promoted, by counteracting the interference of the foreign material of the same kind. It is the interest of the manfuacturer to have the material abundant and cheap. If prior to the domestic production of the material, in sufficient quantity, to supply the manufacturer on good terms; a duty to be laid upon the importation of it from abroad, with a view to promote the raising of it at home, the interests both of the farmer and manufacturer will be disserved. By either destroying the requisite supply, or raising the price of the article, beyond what can be afforded to be given for it, by the conductor of an infant manufacture, it is abandoned or fails; and there being no domestic manufactories to create a demand for the raw material, which is raised by the farmer, it is in vain, that the competition of the like foreign article may have been destroyed.