Beginning in the early 1900s, Puerto Rican sugar has entered the U.S. mainland tariff free. Given this new status, the Puerto Rican sugar industry grew dramatically, soon far outstripping Louisiana’s production. Then, in the middle 1960s, something amazing happened. Production collapsed. Manufacturing sugar in Puerto Rico was no longer profitable. Louisiana, in contrast, continued to produce and grow sugar. We argue that local economic policy was responsible for the industry’s demise. In the 1930s and 1940s, the local Puerto Rican government enacted policies to stifle the growth of large cane-farms. As a result, starting in the late 1930s, farm size fell, mechanization of farms essentially ceased, and the Puerto Rican sugar industry’s productivity (relative to Louisiana) rapidly declined until the industry collapsed. The overall Puerto Rican economy also began to perform poorly in the late 1930s. In particular, Puerto Rico’s per capita income was converging to that of the poorest U.S. states until the late 1930s, but since then it has lost ground to these states. One naturally wonders: was the poor overall performance of the Puerto Rican economy also the result of policy? We show that Puerto Rico embarked on other economic policies in the early 1940s that proved to be major setbacks to its economic development.