William McKenley or Herbert Hoover? Examining the Trump tariff proposal.

 Amid all the garbage Trump spews out I was stunned when Trump articulated a reasonable economic justification for his position on tariffs.  Just to be clear, Trump has said he will impose a 60% tariff on everything coming in from China, and from 10-20% from everywhere else, along with targeted higher tariffs to prevent American companies from moving offshore.  Trump said he models his views after the successful presidency of William McKinley (1896-1901).  This is reasonable.  And so, for the purposes of this policy only, I will state why I respectfully disagree with Trump.

 

Let’s get some context first.  America had a Great Depression before the Great Depression.  Our first Great Depression occurred in 1893, and we did not really start to recover until 1897.  The cause for this depression, which is known as The Great Panic, was a railroad bubble.  People built railroad lines everywhere and a lot of them were not profitable, so a lot of people lost a lot of money.  There was heavy European investment in American railroads, so Europe crashed and burned.  This led to a drastic decreased in foreign investment in America as well as a drastic decrease in international trade.  American industry was just kicking into gear.  William McKinley believed in strong tariffs, and he imposed big tariffs across the board.  However, most American companies had very little international market exposure.  The vast majority of the American market was domestic.  Thus, tariffs really had very little effect internationally, and of course, they did not apply domestically.  The tariffs had such a small effect internationally that other countries did not bother to retaliate.  American exports were not really much of a big deal.  However, American industry grew because of a growing domestic market fueled mostly by immigration to America.  This influx of migrants created increased demand which allowed American companies to grow without worrying to much about international sales.

 

Federal income tax did not exist then.  The federal government used tariffs, excise tax, postal service revenue, and the sale of public lands, much of which were gained through conquest, for revenue sources. 

 

Once the Great Panic was left in the rear-view mirror, global trade opened up once more so that by the outbreak of World War I, American tariffs had lessened, and free trade was the order of the day.  By 1929. America was very much involved in international trade.  Speculation in the American stock market ran wild until the bubble burst on Black Tuesday October 29, 1929.  The stock market rallied after the great crash by 48% reaching a post 1929 crash high in April of 1930.  Then the bottom fell gradually until we reached rock bottom in July of 1932 and the Great Depression was well underway.

 

One of the causes of the crash of 1929 was over supply.  America made too much stuff and short of dumping on to world markets, that supply had nowhere to go.  Because of over supply, companies cut back on workers because they did not need to produce as much.  This caused a decrease in demand that led to even more over supply and the panic was on.  Combine this with over speculation in the stock market fueled by margin loans, and it was all a big disaster waiting to happen.  It happened from October 1929 to July of 1932.

 

Here is where tariffs come into the picture.  Herbert Hoover did what Trump proposes to do now, adopt the William McKinley tariff policies during the late 1890’s.  He worked with congress to pass the Smoot-Hawley tariff Act of 1930.  Keep in mind the stock market had rallied after Black Tuesday and optimism was back in vogue.  Hoover wanted to deal with high unemployment by protecting American industries and so he went back to McKinley’s successful tariff policies. 

 

But times had changed.  America had two things working against it.  First, global markets were now a big part of American company portfolios whereas during McKinley’s era, international trade was only a tiny part of American companies.  The second problem was over supply.  America had too much stuff it could not get rid of.  Europe also had over supply issues.  Both America and Europe had made too much stuff because modern industrial technology was kicking in and the world did not quite know how to deal with that yet.  Industrial technology was to the 1920’s what .com was to the 1990’s.  Thus, when Hoover imposed universal tariffs, other countries retaliated whereas this did not happen under McKinley.  These disastrous tariffs meant that America had even less opportunity to sell its over supply of goods, leaving stockpiles in warehouses.  Our agricultural sector went into the tank.  The Smoot-Hawley Act was a disaster piled on the earlier Black Tuesday disaster and the Great Depression resulted.  It is also noteworthy that Herbert Hoover’s tariffs amounted to a massive tax increase on the middle class which was too much for them to bear.  Rampant poverty was the result.

 

This leads us back to Trump’s tariff proposal.  For the sake of this discussion, let us assume a 60% tariff on Chinese imports and a 10% worldwide tariff on all other imports.  Trump has promised special high tariffs as well.  What we need to ask ourselves is whether our world is more like it was during McKinley’s time, or during Hoover’s time?  If our world is more similar to McKinley’s time, then Trump’s tariffs might yield some measure of prosperity.  If not, disaster awaits.

 

America is very much part of international global trade today.  This alone means our world is more similar to that under Herbert Hoover, than it was under William McKinley.  International imports and exports dominate the American economic landscape today.  This means that the Trump tariffs will cause retaliation by other countries which will lead to a massive trade war.  America also has an oversupply of manufactured goods in many areas.  But even areas where this is not the case would be affected because American export markets will disappear meaning American companies will lay off workers because domestic demand won’t be enough to fuel these companies.  Profits will decrease, which means share prices will decrease, which means 401K’s will decrease.  Meanwhile GDP will also decrease while unemployment will increase.  This will lead to lesser demand which continues the spiral downward because now domestic demand will fall away joining international demand decreases.  American companies will fail along with the banks that loan money to those companies.

 

This is why I believe Trump is wrong to use William McKinley as a role model.  His tariff policies will mimic what happened under Herbert Hoover instead.  Congress has largely allowed presidents to enact tariffs on their own so trump will not need congress to enact his proposals.

 

Make no mistake, the Trump tariffs are a disaster waiting in the wings.  We cannot allow these to be implemented.