Tariffs: The First Financial Battle Below the Structure
The very first economic fight under the Constitution wasn’t over a national bank. It wasn’t over building roads or canals.
It was about tariffs.
This was, as James Madison called it, the subject of “the greatest magnitude” – demanding, he insisted, their first attention. Yet today, this foundational debate, and all its messy details, is almost completely forgotten.
REVENUE ALONE
The story begins in 1789. The Treasury was empty, and Madison’s immediate goal was simple: “revenue.” He proposed a national impost on a range of imported goods, stating that while commerce “ought to be as free as the policy of nations will admit,” the point of this first measure was “revenue alone.”
This wasn’t just some minor housekeeping item. The lack of such a Congressional power under the Articles of Confederation was a primary driver for those who wanted to scrap the system and write a new one with the Constitution.
Those who later became the Federalists had tried to implement a similar 5% impost in 1783. But it was dead in the water by 1786 because, under the Articles, any such plan required unanimous consent from all states – and the plan never got it.
This history is why the debate under the Constitution was so critical; for the first time, Congress finally had the power to act.
SPECIAL INTERESTS
But Madison’s simple “revenue” plan didn’t last long at all.
His revenue-focused bill was quickly hijacked by a Pennsylvania representative, Thomas Fitzsimmons, who derailed the plan by introducing a protectionist amendment to “encourage the productions of our country, and protect our infant manufactures.”
And just like that, America’s first economic debate exploded into a messy, multi-front clash – a regional brawl for special interests.
- New Englanders “declaimed loudly” against a proposed six-cents-per-gallon duty on molasses, which they denounced to the end as “ruinous to their rum distilleries and fisheries”
- Southerners, meanwhile, feared high duties on foreign ships would result in prohibitive freight rates
- Pennsylvanians urged protective duties on local manufactures, which representatives from other areas slammed as a tax on their agriculture
The only real common ground seemed to be a strong tendency for virtually everyone to rail on duties they didn’t like as “oppressive to the poor.”
South Carolina’s Thomas Tudor Tucker blasted the plan warning that tariffs would hit some states hard, while others would pocket the burden as a subsidy, what they called a “bounty.”
New York’s John Lawrence argued that the government shouldn’t interfere at all, stating that merchants “should be left to themselves, like the industrious bee, to gather from the choicest flower the greatest abundance of commercial sweets.”
Despite the regional and special interests clash, the bill was eventually passed through a spirit of mutual concession.”
And to prove just how high-priority this first debate was, on the symbolic date of July 4, 1789, George Washington signed the Tariff Act of 1789 into law. It was only the second act he signed as president.
THE DEBATE RAGES ON
But this compromise was not the end of the story. The debate immediately ramped up again.
In early 1790, Treasury Secretary Alexander Hamilton presented his “Report on Public Credit,” which called for raising more money to deal with the war debt. This led directly to the Tariff Act of 1790, which increased the rates passed in 1789.
Only after that did Hamilton try to shift the entire purpose of the debate.
Through his 1791 “Report on Manufactures,” he made his goal clear: shift tariffs away from just raising money and toward “protecting duties.” He was intellectually honest enough to call this what it was: a “virtual bounty” on domestic products, or a subsidy by another name, to prop up his preferred industries.
On the other side, you had Thomas Jefferson and James Madison. While they opposed Hamilton’s subsidy plan, they had their own interventionist goals. They wanted to use tariffs as a foreign policy weapon.
Jefferson, in his 1793 “Report on Commerce,” argued that if a nation “imposes high Duties on our productions… it may be proper for us to do the same by theirs.”
This wasn’t just academic. By spring 1794, Britain had seized over 200 American ships, and “War looked imminent.” In response, Madison launched a drive in Congress in January 1794 to pass resolutions implementing this retaliatory trade policy, with measures clearly aimed at British trade and shipping.
To head off the war that this growing crisis threatened to start, George Washington sent Chief Justice John Jay to London. The resulting Jay Treaty created a mutual “most favored nation” status. This blocked the U.S. from imposing the special, discriminatory tariffs on Britain that Jefferson and Madison had wanted; in turn, Britain had to give America the same lowest rates it gave any other friendly nation.
The treaty averted war, but it made Jay one of the most hated men in America. He was hung and burned in effigy so many times that he reportedly said “he could find his way across the country by the light of his burning effigies.”
That is how high the stakes were in this first, forgotten debate.
THE ESSENTIAL LESSON
But here is the most important, most forgotten lesson of all.
Read through all their arguments. They fought bitterly over how to use this new tariff power under the Constitution. But not one of them – not Hamilton, not Jefferson, not Madison, anyone – ever claimed the President could just impose tariffs on his own.
Every tariff had to be expressly passed by Congress and signed as law by the President before it could be implemented.
And no one ever suggested that Congress bypass this constitutional requirement by simply re-delegating its constitutionally-degated power to the executive, allowing a president to unilaterally decide later.
They all knew, without a shadow of a doubt, that the power “To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States” was a legislative power, and a legislative power only.
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