In the early 1700s, British children played a game called Beggar-my-neighbor. The object of the game was to vanquish opponents by leaving them penniless. Adam Smith (in Wealth of Nations) used the theme of the game to criticize Mercantilism, a popular practice among European nations to maximize exports and minimize imports using tariffs and quotas.
During the decade known as the Roaring Twenties, major industrial trends were becoming reality. World War I had just ended, and Americans were flush with savings, courtesy of Liberty Bonds. The electric utility industry had been increasing capacity since 1905, and electric motors were replacing horses and steam engines to power the Industrial Revolution. Furthermore, universal electrification favored the introduction of household appliances—radios, vacuum cleaners, refrigerators, washing machines—as well as the recent innovation of moving pictures. By 1929, 70% of homes had electricity.
The financial sector was also affected by the surging economy. Liberty Bonds gave way to corporate bonds. Housing construction had almost quadrupled between 1920 and 1925. And, of course, credit filled an obvious gap. (Even Charles Ponzi noticed the trend.) Speculation was becoming a way of life. And, like today, the optimism of speculators knew no bounds.
By the summer of 1928, the Federal Reserve had raised the New York Fed’s discount rate to an “unheard of” 5%, which had the unintended consequence of seeing capital return to the United States. With that, there was a new surge in domestic stocks, so much so that seemingly everyone was buying on margin. The volume of trading on the New York Stock Exchange rose from 1.7 million shares a day in 1925 to 4.1 million shares by the day of the Crash of 1929.
What really caused the crash? The end of WWI left many countries in debt and/or responsible for reparations. The only way to pay down obligations was trade, and the only realistic tradable items were goods, as gold and services were out of the question. Since the U.S. had come out of the war in better shape than most other countries, the U.S. couldn’t sell all the goods it was producing. Farm produce could be traded, but the value of food paled in comparison with durable goods. To correct this situation, Herbert Hoover promised, if elected (1928), to help farmers by instituting tariffs on agricultural goods. The House passed a version of the Smoot-Hawley Tariff Act in May 1929, five months before the Crash.
It has been argued that the House-Senate Conference version of Smoot-Hawley could not have been the cause of the Crash, as it did not pass until well after the Crash. I beg to differ. Imagine you were a Minister of Trade for Canada. Wouldn’t you start to consider retaliation of some sort?
Following the May vote in the House, boycotts were conducted throughout the U.S., and many foreign trading partners began proceedings to institute retaliatory tariffs against American products. One month before the Crash, President Hoover had heard protests from 23 foreign trading partners. At 59%, the Smoot-Hawley tariffs were the worst of the Twentieth Century. After the crash, the Great Depression lasted until WWII, resulting in much tragedy throughout the world, including the rise of Hitler.
A few days ago, The Wall Street Journal posted an article headlined “Tariffs to Tackle Climate Change Gain Momentum” (Nov. 2, 2021). The theme of the article is that raising tariffs on certain products will cut carbon emissions. The logic seems impeccable, but is it wise?
Products in the crosshairs include steel, chemicals and cement. Tariffs will be imposed based on the levels of carbon emissions in the process of producing the product. The Biden Administration has already concluded a trade agreement with the European Union on trade in steel.
China is the biggest exporter of “Greenhouse” gases, at 1,026 million tons of CO2 (in 2017). But China (with Russia and India) did not bother to attend the Climate Change summit. What will China do if tariffs are applied to its exports? A time-honored practice is to plunder your neighbors.
Reuters reported (Nov. 3) that the number of Russian troops at the Ukrainian border has grown to 90,000. BBC News reported that “China-Taiwan military tensions ‘worst in 40 years’”.
Tariffs will not only hurt America’s middle class, but they will also harm the emerging middle class in China. And we mustn’t think that is a good thing. A vital middle class is necessary for capitalism to endure, and the helter-skelter COVID mandates have been aimed directly at America’s middle class.
If we want China to continue the “Four Modernizations” introduced by Deng Xiaoping in 1979, we need to trade with China, else there won’t be a Chinese middle-class sufficient to demand reforms of the CCP. Only a reasonably confident middle class in China will be able to accomplish this, and trade is the only way that a Chinese middle class can grow to critical mass.