"There are weighty inducements to prefer the employment of capital at home even at less profit, to an investment of it abroad, though with greater gain," he wrote. "These impressions will prove a rich mine of prosperity to the Country, if they are confirmed and strengthened by the progress of our affairs. And to secure this advantage, little more is now necessary, than to foster industry..." He added, "[I]t is the interest of a community with a view to eventual and permanent economy, to encourage the growth of manufactures. 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. The Nation which can bring to Market, but few articles is likely to be more quickly and sensibly affected by such stagnations, than one, which is always possessed of a great variety of commodities."
And this was absolutely the basis of the true wealth of a nation, Hamilton believed.
"There is ground to believe, that a difference of situation, in this particular, has immensely different effects upon the wealth and prosperity of Nations.
"From these circumstances collectively, two important inferences are to be drawn, one, that 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; the other (which is also a consequence of the first) that countries of the former description are likely to possess more pecuniary wealth, or money, than those of the latter."
Having provided this overview, Hamilton got right to the meat of the matter – his 11-step plan, based on Henry VII's Tudor Plan, which would later be used by Japan, Germany, South Korea, and China, to build industry. After a paragraph of introduction, the first on his list was protecting duties, known today as tariffs. An easy way of explaining tariffs is to say, "If there's a dollar's worth of labor in a pair of shoes manufactured in the United States, and you can make the same pair of shoes with twenty cents worth of labor in China, then we're going to charge you an eighty cent tariff when those shoes are imported into the United States. If you can make them with fifty cents of labor in Mexico, then our import tariff is fifty cents. Whatever and wereever, import duties are used to equalize manufacturing costs and protect domestic industries.
After Hamilton's plan was adopted, tariffs became so important that 100 percent of the revenue of the US Government from the late 1700s until the Civil War came from tariffs. Two-thirds of our revenue from the Civil War to WWI came from tariffs. And even when government had grown exponentially as we led up to World War II, fully a third of all federal revenues came from Tariffs.
Here's how Hamilton wrote it:
A full view having now been taken of the inducements to the promotion of manufactures in the United States, accompanied with an examination of the principal objections which are commonly urged in opposition, it is proper, in the next place, to consider the means by which it may be effected. 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:
1. 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. It has the additional recommendation of being a resource of revenue. Indeed, all tile duties imposed on imported articles, though with an exclusive view to revenue, have the effect, in contemplation, and, except where they fill on raw materials, wear a beneficent aspect towards the manufacturers of the country.2. Prohibitions of rival articles, or duties equivalent to prohibitions.
This is another and an efficacious mean of encouraging national manufactures; Of duties equivalent to prohibitions, there are examples in the laws of the United States, but they are not numerous. 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.3. 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 tile 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 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.4. Pecuniary bounties.
A. 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.
This has been found one of the most efficacious means of encouraging manufactures, and is, in some views, the best. Though it has not yet been practised upon by the Government of the United States (unless the allowance on the expiration 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:B. 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 per cent. duty on the foreign article, converted into a bounty on the domestic, will have an equal effect with a duty of two per cent., 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 per cent.; in the other in that of two per cent. 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.
C. Bounties have not, like high protecting duties, a tendency to produce scarcity.D. Bounties are, sometimes, not only the best, but the only proper expedient for uniting the encouragement of a new object.
The true way to conciliate these two interests is to lay a duty on foreign manufactures of the material, the growth of which is desired to be encouraged, and to apply the produce of that duty, by way of bounty, either upon the production of the material itself, or upon its manufacture at home, or upon both.
Pecuniary bounties are, in most cases, indispensable to the introduction of a new branch. Bounties are especially essential in regard to articles upon which those foreigners, who have been accustomed to supply a country, are in the practice of granting them.
The continuance of bounties on manufactures long established, must almost always be of questionable policy: because a presumption would arise, in every such case, that there were natural and inherent impediments to success. But, in new undertakings, they are as justifiable as they are oftentimes necessary.5. Premiums
These are of a nature allied to bounties, though distinguishable from them in some important features. Bounties are applicable to the whole quantity of an article produced, or manufactured, or exported, and involve a correspondent expense. Premiums serve to reward some particular excellence or superiority, some extraordinary exertion or skill, and are dispensed only in a small number of cases. But their effect is to stimulate general effort;
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