The first two installments of this series sketched the broad arc of U.S. trade policy from 1789 to 1860 and introduced the “Three R’s” framework—Revenue, Restriction, Reciprocity—that Douglas Irwin offers as a map to the otherwise bewildering thickets of tariff politics. Those missives ended on the eve of the Civil War, just as the Revenue Era was giving way to the long Restriction Era that would dominate Washington for almost three-quarters of a century.
This post carries the narrative forward from 1865 through 1932, a span that begins with the Union army’s return home and ends amid the worst contraction in modern economic history. Between these lies Justin Morrill’s permanent tariff wall, the rise of America’s first multinational corporations, the agrarian revolt, the progressive insurgencies, the “American Commercial Invasion” of world markets, two world-scale liquidity shocks, and the infamous Smoot-Hawley Act that closed the Restriction Era for good.
The goal of these notes continues to be not merely a retelling of Irwin’s definitive account but rather an effort to tie pivotal episodes back to the Three R’s, draw lines to 21st-century industrial/trade policy, and extract investable lessons for today’s global capital allocator. Where the historical record yields ambiguities, we emphasize the competing interpretations—precisely the sort of dissonance investors must parse to locate mis-priced risk.
Trade Policy Following the Civil War
The immediate post-Civil War period exemplifies a crucial pivot in U.S. trade policy. Policy that began as wartime fiscal expedients became permanent structural features. The Morrill tariff, enacted in 1861 primarily to finance the Union’s war effort, had notably raised average duties on dutiable imports to about 47 percent. By 1865, this elevated tariff regime was entrenched, sustained by several intertwined forces. First, the federal government emerged from the war burdened with a staggering debt of approximately $2.7 billion, some 30 percent of GDP at the time. This fiscal strain made cutting tariffs risky, as customs duties were vital for government revenue. Bondholders thus benefited from a generation of fiscal conservatism, while equity investors in protected domestic industries enjoyed durable shelter from foreign competition.
Secondly, the political landscape was shaped by the South’s disenfranchisement. As the former free-trade Democratic bloc was effectively sidelined, the Republicans secured near-monopoly control of tariff policy debates. This political monopoly fostered an environment ripe for rent-seeking, enabling oligopolies in key sectors such as iron, wool, and sugar to solidify their power behind tariff walls.
Third, Northern manufacturers had greatly expanded during wartime procurement, investing heavily in capacity that necessitated continued protection lest they face foreign competition that could undermine their profits. Lastly, the post-war deflation increased the implicit protection afforded by specific tariffs, which were fixed in nominal terms but rose in real terms as prices declined—a phenomenon that investors must consider carefully when evaluating tariff impacts over time.
This interplay of political economy and fiscal necessity illustrates the transition from Revenue motives toward Restriction-driven tariffs, a dynamic not foreign to today’s investors who observe temporary taxes and surcharges masquerading as emergency measures, yet are often retained beyond their ostensible rationale.
In 1867, an early attempt to reform tariff policy nearly recalibrated this trajectory. David A. Wells, a former protectionist turned skeptic, persuaded the Senate to reduce duties on raw materials—a move that could have lowered the effective rate of protection on capital and intermediate goods like machinery, catalyzing U.S. manufacturing exports earlier. However, resistance led by tariff hardliner Justin Morrill in the House stalled reform, entrenching the high-tariff status quo. This episode should remind investors of how seemingly minor legislative inflections can reshape comparative advantage and thus long-term sectoral valuations.
The decade following saw tentative efforts at tariff relief thwarted by political and economic reversals. A broadly reduced tariff passed in 1872, lowering duties by approximately ten percent, but revenues collapsed in the Panic of 1873, prompting a swift reversal and tariff hikes by 1875. Tariffs thus acted pro-cyclically: politicians eased tariffs during boom times and tightened them during downturns.
The 1883 tariff episode, known derisively as the “Mongrel Tariff,” vividly illustrated coalition politics as the engine sustaining Restriction. Despite a tariff commission recommending substantial cuts of 20-25 percent, political horse-trading restored most previous inequalities, satisfying entrenched interests—from Pennsylvania’s steel producers to Ohio’s wool manufacturers and Louisiana’s sugar planters. This pattern presaged cornerstones of modern lobbying: maintaining regulatory moats is easier and cheaper than innovating technological ones, a dynamic critical for understanding lobbying intensity by sector size and competitive elasticity.
The late 1880s and early 1890s featured a high-profile tariff contest between President Grover Cleveland, a Democrat who condemned tariffs as indefensible extortion, and Republican challenger William McKinley, who proposed raising rates further while introducing complex scheduling aimed at protecting both farmers and manufacturers. While average tariffs barely changed, the structure shifted—the tariff schedule eased raw materials but intensified protection on finished goods, a counterintuitive outcome compared to modern industrial policies that often advocate the opposite.
This era also saw the experimental use of reciprocity provisions under Secretary of State James G. Blaine. These clauses sought trade concessions from Latin American countries in exchange for reduced U.S. tariffs on their tropical products. Although short-lived, this approach bears resemblance to more recent strategies, such as the U.S. Section 232 tariffs, which aim to leverage national security for trade advantages. Both demonstrate the limited durability of coercive reciprocity in a world of retaliation.
The Dingley Tariff of 1897 marked a reaffirmation of high tariffs, raising average duties from 35 to nearly 50 percent, with specific rates fixed at earlier price levels, thus amplifying protection in the context of deflation. For investors, this highlights how commodity price cycles and currency fluctuations can amplify nominal tariff protection, as seen today with equipment manufacturers benefiting from adequate protection due to currency devaluations in key emerging markets.
At the turn of the century, the U.S. benefited from a surge in cost-advantageous manufacturing driven by resource discoveries, such as the Mesabi iron ore range, enabling firms like U.S. Steel to vertically integrate and dominate global markets. Yet a paradox remained: exporters like Carnegie’s operations often did not lobby for tariffs, relying instead on inherent competitiveness, while smaller competitors invested heavily in political advocacy. This phenomenon cautions investors to distinguish between the lobbying needs—and thus vulnerability—of median vs. dominant firms within sectors.
Simultaneously, the Sixteenth Amendment in 1913 introduced the federal income tax, which effectively meant that government revenue no longer depended on customs duties. This shift freed tariffs from fiscal necessity, increasing their use as pure protectionist devices. The subsequent outbreak of World War I ushered in new political and economic dynamics. The Underwood-Simmons tariff act reduced average rates substantially but was soon overshadowed by wartime supply disruptions that fueled exports. The postwar era saw a resurgence in tariff levels, exemplified by the Fordney-McCumber Tariff in 1922, which restored rates to levels close to those of the McKinley era. Notably, large export-oriented firms were largely ambivalent, while smaller manufacturing interests seized political advantage. Equity markets during the 1920s evidence that tariff levels did not dictate investment returns; rather, liquidity and monetary factors predominated—a lesson for today’s investors assessing the interplay of protectionism and macroeconomic trends.
The apex of the Restriction era was the Smoot-Hawley Tariff of 1930, which increased average statutory duties on dutiable imports from 41% to 53%, translating to an even higher effective rate during the subsequent deflationary period. The legislative process revealed political pathologies: an initial modest bill was successively expanded by interest groups until political logrolling restored tariff levels despised by economists. While the Wall Street crash preceded the final tariff passage and the global collapse of trade was driven mainly by monetary contraction, the tariff’s retaliatory effects exacerbated export declines and global financial distress, particularly worsening conditions for agricultural commodities.
For investors, the Smoot-Hawley episode illustrates that tariffs are seldom the primary cause of recessions but can amplify downturns and propagate protectionist spirals harmful to export-oriented industries, a relevant caution for today’s sectors highly sensitive to international elasticities, such as energy equipment or critical minerals.
Reflecting on this period offers several enduring lessons for contemporary investors. First, policy path dependency is formidable but not immutable; only seismic shocks, coupled with political realignments, have historically precipitated lasting trade policy shifts. The COVID-19 pandemic and the U.S.–China tech conflict exhibit some disruptive traits but have yet to generate the cohesive, bipartisan mandate necessary for structural policy transformation. Investors would do well to weight probabilities toward continuity with incremental drift rather than sudden rupture, unless a unifying narrative emerges.
Second, it is crucial to watch the political pressures on median firms rather than the largest exporters. Tariff rents disproportionately benefit and are defended by less competitive firms, which shapes the scope and timing of tariff adjustments. Identifying sectors with valuation supported by implied policy backstops (rare earth metals, for example), especially where smaller players require protection, can reveal asymmetric investment opportunities.
Third, fiscal stress remains a key lever on trade policy flexibility. The income tax severed the revenue dependence on tariffs, allowing pure protection to flourish. At the same time, today's soaring deficits may drive unconventional revenue-raising measures such as global digital levies, capital entry fees, or carbon border adjustments. Fourth, deflationary environments magnify the protection offered by specific tariffs, which are often fixed in nominal terms. Post-1929 deflation elevated the real effective tariff beyond the statutory hike, a dynamic that investors can hedge by favoring firms benefiting from specific-rate duties in downturns while underweighting downstream customers adversely affected by cost-push effects.
Finally, the flexibility of tariff instruments creates option-like characteristics—what the 1922 Fordney-McCumber tariff did with adjustable rates resembles modern Section 232 or 301 authorities. These discretionary levers impart "policy gamma," where small informational signals can provoke significant realized protection. Investors attuned to regulatory timelines and investigative processes may exploit mispricings resulting from market underestimation of this optionality.
Between 1865 and 1932, the United States marched firmly through a Restriction era dominated by durable high tariffs that only shifting political coalitions and severe external shocks could unsettle. Entrepreneurs who grasped the permanence of this protection—such as steel magnate Andrew Carnegie or the sugar Havemeyers—transformed policy into long-term monopoly rents, while those, like Midwestern farmers, who bet on tariff relief, suffered disproportionate losses.
Today’s debates over industrial strategy and supply-chain resilience echo these historical themes but unfold against a vastly more integrated and rapid financial ecosystem. The investor’s edge lies not in ideological zeal but in the disciplined recognition of structural patterns—monitoring when Revenue, Restriction, or Reciprocity will drive the next policy lurch—and positioning capital for asymmetric gains. The next installment will explore trade policy from Cordell Hull's reciprocal agreements to the recent semiconductor export controls, continuing this journey through history and its lessons for discerning investors.