Trump’s Tariffs, A Feeling Of Deja Vu
Over the weekend, President-elect Donald Trump posted a warning to the BRICS Nations: create a new currency and lose America as a customer. Here’s his post:
“We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty US Dollar, or they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful US Economy. They can go find another ‘sucker!’ There is no chance that the BRICS will replace the US Dollar in International Trade, and any Country that tries should wave goodbye to America,” Trump warned.
It has a very familiar ring for those familiar with America’s economic history. Although the names and specific voter groups have changed, there is a similar political rationale between what happened in the 1920s and what’s happening today in the 2020s.
Back then, a wealthy businessman, Herbert Hoover, was elected in large measure for his vaunted ability to manage the economy. New technology presented the country with dramatic change. The age of electricity began — electricity that would light our cities and power those new assembly lines that people like Henry Ford were making.
Horses and buggies were replaced with cars and trucks. Not only were these new vehicles more powerful and economical to operate, but they also freed up all the acres used to feed the horses and oxen. About one-fifth of all the farmland used for animal feed could now be converted to food crops.
The 1920s saw dramatically increasing productivity. However, this enhanced productivity also meant oversupply and lower prices. Farmers were particularly hard hit. New tractors plowed more land than a mule. Farmers eliminated their animal feedlots and produced more, resulting in lower and lower prices at the market.
Rural America was getting desperate. Lower food prices, resulting in lower farm income, meant many farmers were in financial trouble. Something had to be done.
Two Washington Politicians stepped in: Reed Smoot, a Senator from Utah, and Willis C. Hawley, a Congressman from Oregon. Both were from the West and had substantial numbers of farmers as their constituents. In fact, a century ago, farmers were the dominant political force in the country, with nearly a quarter of the nation living on farms.
Smoot and Hawley came up with their solution: They would slap tariffs on foreign products coming into the country. They felt this would help prop up farm prices and other prices in the economy.
While tariffs made emanate political sense, how could Washington oppose something that a quarter of the country supported? Nevertheless, many understood that the Smoot Hawley Tariffs would lead to a decline in business activity and profound shortages.
Henry Ford was particularly adamant about opposing the tariffs. He spent an evening at the White House in a vain effort to stop this “economic stupidity.” Renowned economists like Frank Taussig, creator of modern trade theory and economist and statistician Irving Fisher, also opposed the tariffs.
However, most ironic, Wall Street stood strongest in its effort to stifle the tariffs. Thomas W. Lamont, JP Morgan’s Chief Executive, said he,
“almost went down on [my] knees to beg Herbert Hoover to veto the asinine Hawley–Smoot tariff.”
Despite such formidable opposition, the Smoot Hawley Tariffs passed the US House of Representatives on May 28, 1929. Immediately, international trade began to decline, as did overall business activity. Less than five months later, the Great 1929 Stock Market Crash occurred.
The more “deliberative” US Senate finally passed the Tariffs in June 1930, and President Hoover signed the bill into law on June 17, 1930. Trade Tariffs now fully controlled America’s international commerce.
At its peak in 1933, the Smoot Hawley Tariff imposed a dutiable tariff rate of just under 20%. From the peak year of 1929 until the trough year of 1933, American imports fell by two-thirds, exports fell by nearly the same, and the country’s GDP fell by almost one-half (from $103 billion to $56 billion). But it was the unemployment rate that demonstrated real pain for the average American. Unemployment during that same four-year period tripled (from 8% to 25%).
One of the most active debates in Economics is the role of Smoot Hawley Tariffs in creating the Great Depression of the 1930s. For monetarists like Milton Friedman, the Tariffs played only a small role. Friedman asserts that the role of the Federal Reserve and its manipulation of the money supply had far more influence in starting the Depression.
However, Friedman notwithstanding, most economists feel that Smoot Hawley made matters worse. The timing of this hindrance to trade could not have come at a worse time — just as the economy was on the knife’s edge after a decade of unbridled financial expansion. The tariff restrained both imports and exports. Designed to help the farmers by restraining foreign competition, it also limited the farmers’ overseas markets.
The parallels between America’s 1930s economy and today could not be more stark. Today, another businessman President has been elected to help the economy. An influential constituent, this time the Wall Street Bankers, would be my guess, is asking for protection from an international threat. This time, it’s the loss of the US Dollar’s reserve status.
And just like Hubert Hoover a century before, it looks like Donald Trump will bow to that constituency and enact massive tariffs on any country that opposes the Dollar as Reserve.
Unfortunately, if history is our guide, the results may not be as sanguine as President Trump and the big Bankers hope.
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