No More Trade Wars Please
The real story of the Great Depression trade war starts with America’s mistakes as an emerging world power, our adolescence as a world power, starting with the Philippines and World War I. Because the Naval Secretary was gone, under secretary Teddy Roosevelt was able to order the US fleet into Manila Bay leading to war in the Philippines and the February 1899 invasion of the Philippines. This was later to force Japan in World War II to attack the US. In World War I, US entry came just in time to prevent a German victory. With fresh troops from the Russian front after Russia pulls out of the war, Germany was on the offensive until the US troops arrived. This broke the pattern of history where the number one economic power in Europe was denied the victory in the hegemonic war that they normally would have won. The number three power in Europe, France, then was able to impose retribution not just for the current war, but also for the indignity of the Franco-Prussian War of 1870-71. John Maynard Keynes, the greatest economist of the twentieth century, was a young man on the British negotiating team at Versailles, and later wrote a book about how these reparations payments demanded of the Germans would lead to another war. He was right.
Forcing Germany to pay reparations after an exhausting war, led to the US financing those reparations as the new number one economic power in the world. But this put US farmers at a disadvantage leading to great farmer suffering in the twenties. Since about 85% of all revenues for US government in the nineteenth century came from tariffs on foreign imports, the first step was a tariff in 1921. As an emerging power in the nineteenth century, tariffs helped protect the infant American manufacturing industry in the North from the British manufacturers. That galled prosperous Southerners with their slavery plantations and was the number two reason for the Civil War after the more obvious slavery.
So the roaring twenties started with the post war depression 1919-1921, then led to Spindletop oil and Ford Model T’s combined for 48% growth in five years from 1922-1926. That was it, that lone five year period was the roaring twenties. Then the economy stalled, as the top 20% of American families all had their Model T, so sales stalled.
The 1927-28 two year flat economy led to the Hoover election of 1928. He promised a tariff to protect the long suffering farmers of America as the balance of trade was still suffering from the German reparations financed by American banks. Hoover’s mistake was not to recognize that Europe was unprepared to put up with America continuing to act like a small emerging power when they were now the largest economy in the world, the equal of Europe as a whole. Hoover took office and the economy grew 6.6% in 1929. Still, promises are promises, and the main campaign pledge of Hoover began with a special session of Congress in September 1929. The process had begun on the Smoot Hawley Tariff. The stock market and economists could see the impending disaster, so the stock market shuddered twice in September, and crashed four days after the bill came out of committee on October 28, 1929. But the economy was still doing fine growing even for the first five months of 1930. 1000 economists begged the president not to sign the bill, but he did anyway, on June 11, 1930. Only then did the economy begin collapsing, -9.9% in 1930, -7.3% in 1931. Then the Germans stopped paying reparations. Hoover’s blue ribbon business panel, the Hump Commission recommended spending money. Instead, Hoover doubled down trying to balance the budget and the economy went -14.8% more into the hole in 1932 and Roosevelt was elected. The economy stabilized in 1933 with a -1.9% drop for a total drop of 30.2% and a rise of unemployment to 25%. Meanwhile trade dropped from 7% of the economy down to 2%. Trade multipliers are high, estimated 8 to 10 in the seventies. This 5% trade drop with a multiplier of six would explain the drop in the Great Depression. Further proof that trade war was the main problem in the Great Depression comes from the fact that America and France, the agricultural powers, suffered the most in the agricultural trade war. The more manufacturing oriented Britain and Germany did not lose share of the world economy in the thirties like America and France did. France had it worse than America. This supports the notion that the Smoot Hawley agricultural and mineral tariffs were the main trigger of the Great Depression trade war.
The economy grew 86% in the eight prewar years from 1933 to 1941 as Keynes advised Roosevelt to spend money and he ran a combined 31% deficit in those years. That’s an average growth rate of almost 11% per year with a mostly jobs program deficit of 4% per year. The unemployment rate dropped from 25% in 1933 to 10% in 1941. Happy days were here again. Note how the New Deal got triple the growth rate from their deficits. The war did fully employ people again, with an average unemployment rate of about 2%. Note that both periods, New Deal and war, reduced unemployment about 2% per year. But look how inefficient the deficit was with military deficits. The four war years grew 26% on 155% deficits. That’s 6.5% growth on 39% deficits on average. So the multiplier under New Deal programs was 2.75 and under the war was 0.17. That makes the peacetime deficit multiplier 16 times more effective that the war time deficit multiplier. Giving all the credit to the war for ending the Depression is to mistake an accident of historical timing for cause and effect. Military spending is an extremely inefficient way to stimulate the economy.
When Trump threatens to heavily tax products from factories moved overseas, he is essentially trying to duplicate the capital flow controls of a country like Sweden. We all know it is a mistake to confuse democracy with capitalism. Likewise, it is a mistake to confuse product free trade with free capital flows. It does not impinge on free trade to prevent factories from moving overseas. Germany has been able to keep their manufacturing economy in the new world of globalization and trade treaties. Germany has the advantage of labor being able to appoint half the directors of a company, hence when they build a factory overseas, it is a healthy expansion, not a way to undercut domestic labor. We don’t need to end trade treaties; we just need to control the flow of factories overseas. Besides, free trade is not free trade; it is negotiated trade, still negotiated between two countries but in a larger overall treaty framework. Note also that lost research and capital resources are still critical. Restoring military capital and research to manufacturing in the late nineties grew manufacturing in America despite the 1993 NAFTA and WTO treaties. Withdrawing military capital and research from manufacturing in the two years after September 11 cost 1.8 million manufacturing jobs. The trade treaties cost another 1 million manufacturing jobs just before that military buildup. So reducing the military budget and controlling capital flows overseas are the keys to restoring manufacturing and middle class job growth.
For a complete hundred year war and peace economy history of America since 1910:
For more detail on the Depression and Roosevelt War Periods:
Dr. Robert Reuschlein, Dr. Peace,