344 - Tariffs and the Great Depression: Be Forewarned

The president of the United States cares much more about achieving dominance over others than about governing. Compared to even the weakest of his predecessors in high office, he cares very little for the hard work of governance -- the delivery of governmental services -- and much more for personal performance. He booms and struts, emails in all CAPS, and lays down diktats in order to show who's boss, who's dominating. As an astute observer commented, "He approaches foreign policy, the U.S.-led order, as a protection racket." You have to show respect to the boss, and pay up. In part, that is what Trump's obsession with tariffs and protectionism is all about.

Unfortunately, punitive tariffs, which Trump is introducing once again, have not well served us, or the entire global trading system, in the past. A case can be made, as President Biden articulated, for strictly targeted, narrowly focused protectionism in order to achieve specific industrial or economic goals. But Trump over and over says that he is using high tariffs to force other countries (including our closest and longest allies) to "respect" the United States and to stop what he calls "ripping off" the U.S. (There is no evidence of any "ripping off.") He thinks erroneously that foreign manufacturers will open new factories in the U.S. to avoid the punishing costs of tariffs. He claims that a surge of American tariffs will make the U.S. stronger (and him more powerful). But again, the evidence is at best exceedingly mixed.

The U.S. stock market has already given its answer. Down, and down some more. Raising tariffs will cost consumers much more, and likely lead to renewed inflation. New automobile prices may rise by as much as $10,000. Lumber from Canada will be much more expensive. Alcoholic beverages from Europe may be priced prohibitively (Trump has threatened 200 percent tariffs). Tourists have stopped coming to America's shores (both because of higher cost tariffs and the way in which Trump's disciples are harassing travelers, visa holders, and even green-card recipients). Certainly, in the short run, causing untold economic damage to our friends (and ourselves) makes absolutely no sense politically. All it does is weaken the West in the face of Chinese and Russian ambition. Or could that deviously and devilishly be the point?

Our own longitudinal experience with tariffs should be profoundly cautionary. Just after World War I, to protect truly infant American industries, Congress voted in emergency tariffs to protect chemical and other American manufacturers who might theoretically have been inundated with goods produced by depressed and hungry European labor. But President Wilson, echoing the great economist John Maynard Keynes, explained that if Americans wanted Europeans to prosper, and to settle their debts (to the U.S., among others) "we must be prepared to buy from her."

As Lord Keynes wrote in 1920: "Europe, if she is to survive her troubles, will need...magnanimity from America...." Today, those words could apply well to both halves of the U. S./E.U. equation. Magnanimity should replace the code word "reciprocal." The U. S. desperately needs a strong Europe as well as a strong North American consort of nations. Trump only thinks of strong self.

President Harding's election in 1920 was in part a rejection of Wilson's sensible approach to post-war resettlement and reconstruction. The emergency tariff of 1921 was heavily protectionist, and made selling our agricultural bounty very difficult. Another major tariff imposed in 1922 (the Fordney-Macomber tariff) established even higher tariff rates, and authorized Harding to keep raising rates to punish Europe and the rest of the world. Harding and President Coolidge in fact raised tariffs beyond 50 percent in boosting amounts thirty-seven times before 1928. Rates on iron rose and rose.

Fordney-Macomber precipitated an all-out tariff war with our ostensible trading "partners." That war seriously reduced American sales abroad and began the process of American firms setting up branches and factories abroad -- to avoid "reciprocal" tariffs.

President Hoover should by his training have known better. But he enthusiastically in 1930 signed into law the Hawley-Smoot tariff bill. It raised all tariffs higher and higher, causing a major slump in American exports. Retaliatory tariffs, of the kind that come into existence on April 2 in response to Trump's punitive excise imposts on automobiles and much else, cascaded upward.

The 1929 crash of stock market values, and the wiping out of fortunes and bank accounts, can be attributed to high and reciprocal tariffs only in part. But there is no doubt that the collapse of major amounts of trade between nations exacerbated a global and American loss of confidence in the market, led to major job layoffs, and culminated in the Great Depression of 1930-1942. A little bit of carefully targeted protectionism had always been helpful. Massive, punitive, senseless imposts on trade in goods and commodities were foolish and will be again.

Be reminded that in August 1931, 158 U. S. banks failed. A month later, 305 more banks failed. And in October 1931, 522 banks shut their doors. The Federal Reserve tightened credit and held on to gold reserves (two bad moves), making fiscal results more dire. But tariffs started it all.

In the 1930s, the U.S. was a growing economic power with enough heft to tip the trade balance overboard. Today, the U.S. still leads the world economically. That is why Trump's tariffs are about to be far more destabilizing than the ones called Hawley-Smoot.

Creating absolute havoc across so many trading relationships hardly raises the wages of workers. During his first presidential term, Trump’s tariffs totyally failed to stem the long term decline in American blue collar jobs. His actions did elevate costs for American factory owners and weakened our country’s economic growth performance.

Remember that the collapse of the world economy, thanks to tariff wars, caused enormous despair in the 1930s. "Throughout the Western world," one key text says, people "brooded over whether the great society of the West...had not begun to disintegrate." And Mussolini and Hitler rose.

In the 1930s, our partnership with Europe was hardly established and neither Canada nor Mexico were so tightly integrated into our own and the entire North American economic system as they are now. It makes no sense at all to destroy that long-constructed relationship. Nor does it make any sense (economic, social, political, or cultural) to give economic pain to our partners in NATO and Europe.

It makes absolutely no sense unless, of course, one's goal is to show dominance and seek toadying respect. Or, and here is an unworthy conjecture, it makes no sense unless you really are the Manchurian president, owing gifts to Putin and Xi Jinping.