From Mercantile to Free Market Economics

Strong Central Control over Commerce (i.e., a King or a Queen) Positive Trade Balance Colonies (for raw materials and to buy finished products!) Mercantile Economy

Private Property (No more King!) Positive Trade Balance Market forces control price, supply, and demand! Free-Market Economy

US Constitution; Article I, Section 8 The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; To borrow Money on the credit of the United States; To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

Despite Constitutional authority to regulate trade, early Presidents and Legislatures chose a hands-off approach known as Laissez-Faire (“Hands-off” in French)

5 Pillars of the Free Enterprise System 1.Private ownership of businesses 2.Competition 3.Private Property 4.Profit motive 5.Consumer sovereignty

The Law(s) of Supply and Demand * If demand increases and supply remains unchanged, a shortage occurs, leading to a higher price. * If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower price. * If demand remains unchanged and supply increases a surplus occurs, leading to a lower price. * If demand remains unchanged and supply decreases a shortage occurs, leading to a higher price.

Why are we doing this? We’re getting ready to talk about the Tariff of Abominations, which was called by that name because it was despised in the South! (An abomination is anything that is hated!)

Hopefully you know by now that a tariff is a tax on imports. The Tariff of Abominations was hated in the South because the South had little or no manufacturing capability (unlike the North). The Tariff was a Protective Tariff, that is, a tariff designed to protect American (“domestic”) manufacturers from foreign competition.

Since most of the nation’s manufacturing was in the North, the South saw the Tariff (the highest in the history of the country) as a “South Only” tax; they despised it!

If we’re going to understand why the South was upset, we have to know how a tariff works and why it caused higher prices in the South. First, we have to understand what goes into the determination of the price of any retail merchandise.

Prices are the sum of the costs associated with production (“the cost of doing business” or CoDB from now on) plus the profit expected on the item. Remember that profit is one of the five pillars of the Free Enterprise system!

What goes into the CoDB? Usually, labor is the largest expense for any business, followed closely by the cost of raw materials and supplies necessary for the production process. Administrative costs (office supplies, for example), fees, licenses, taxes, and other assorted expenses usually come last.

We could add it up like this: CoDB + Profit = Price LaborMaterials Rent, tools, maintenance, etc. Fees, licenses, taxes.

Before you start saying “Those evil corporations charging their obscene profits!” consider that MOST of the profits from any business usually go back toward operating expenses (the CoDB) so that the company can keep operating!

So, what happens when two companies that are in competition in the same market are given an uneven playing field? Let’s say that two companies are in the rocking chair business. One company makes rocking chairs here in the United States; the other imports rocking chairs from England.

American Rocking Chair CompanyRocking Chair Company of Great Britain CoDBCoDB LaborLabor MaterialsMaterials Rent, tools, maintenance, etc.Rent, tools, maintenance, etc. Fees, licenses, taxes.Fees, licenses, taxes, and a Tariff

Did you notice that the expenses for the two companies were not equal? Because of higher operating expense, the Rocking Chair Company of Great Britain will have to charge more for its chair. Recall the Law of Supply and Demand; Higher price means lower demand, which mean more people will buy the cheaper chair from the American Rocking Chair Company.

That’s how a protective tariff works! It gives the domestic manufacturer a competitive advantage so that people are more likely to buy the domestic product rather than the imported product!

In short, the South saw the Tariff as a punishment! South Carolina passes a nullification (“cancellation”) ordinance in protest. They were NOT going to pay this “South only” tax!! Andrew Jackson threatened to send Federal troops to enforce the ordinance, but cooler heads prevailed; South Carolina repealed its ordinance and Congress acted to reduce the Tariff, eliminating the crisis! However, many historians consider the Nullification Crisis of the Jackson Administration to be the first act of the Civil War!