Land Of The Free Trade

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With an economy now larger than all of Europe’s, only the United States could lead the world back to the peaceful and fruitful free-trading patterns of the pre-war era. It failed to do so and, once more, injured itself far more than it injured other countries.

For one thing, the United States severely restricted immigration in 1921, depriving itself of the steady inflow of that most priceless of all economic assets, human capital. Far worse, the U.S. government ended the financing of food shipments to Europe eighteen months after the war ended. The market for food exports collapsed, and this helped push American agriculture into a depression from which it would not recover for twenty years. A decade later that depression would spread around the world.

Worse still, the United States refused to cancel war debts owed by its allies, despite their parlous financial state and their importance to us as trading partners. Indeed, about the only means the United States employed to sustain the world economy as a whole was to lend large sums of money to defeated Germany, which in turn used the money to pay reparations to Britain and France. They in turn sent the money back to the United States in payment of war loans. For a while this staved off disaster, but when U.S. lending dried up in the late 1920s, the world economy began to crumble.

It turned into a collapse when the United States tried to wall off its own economy with the Smoot-Hawley Tariff, the darkest day for the American Smithian inheritance. The United States had reversed the downward trend in tariffs of the Wilson years with the Tariff of 1922, which was primarily intended to help the increasingly distressed farmers.

Then, in the presidential campaign of 1928, Hoover sought the still-troubled farm vote with a promise to raise the tariff on agricultural products once again. He called a special session of Congress in 1929 to fulfill his promise to the farmers. But it soon turned into what can only be described as a special-interest feeding frenzy, as capitalists looked after their individual interests and no one at all looked after the common good.

Every major industry, and countless minor ones (tombstone makers, for instance), paraded before Congress, demanding protection against “unfair” foreign competition. (Unfair competition, in the peculiar lexicon of protectionism, means foreign competitors able and willing to sell to American consumers for a lower price than domestic manufacturers can and will.) With economic conditions unsettled after the stock-market crash and potent postwar xenophobia still abroad in the land, unstoppable political momentum developed. Hoover signed the greatest tariff increase in American history into law in 1930, despite a petition of more than one thousand economists who predicted disaster.

The economists were right for once. Other countries immediately retaliated with sharp hikes of their own, and American foreign markets vanished. U.S. exports in 1929 had been valued at $5.341 billion. Three years later they were a mere $1.666 billion, the lowest they had been, allowing for inflation, since 1896. They would not reach 1929 levels again until 1942, when a second catastrophic war finally ended what Smoot-Hawley, perhaps more than any other single factor, had caused: the Great Depression.

The Second World War, like the First, greatly strengthened the position of the United States relative to its international trading partners. All the other great trading nations had been badly damaged, if not utterly devastated, by the war, and at its end the United States had, temporarily, over half the global GNP. Once again only the United States could lead the world out of the disaster. This time, having learned the painful lessons of the twenties and thirties, it did so.

The United States was instrumental in establishing a new international financial order, called Bretton Woods after the New Hampshire town where it was negotiated. This agreement fixed the value of the dollar in gold and in effect restored the gold standard that had so promoted world trade in the years before World War I.

Further, the United States provided massive aid to countries devastated by the war, both allies and its former enemies, by means of the Marshall Plan, the World Bank, and the International Monetary Fund. Meanwhile, there was no talk of “reparations” or attempts to collect loans made during the war to allies.

Today, the American trade gap has nearly vanished. so has a world economy made up of distinct, independent national economies.

Still more important, the United States abandoned the protectionism that had cost it so dearly in the 1930s and led the way on tariff reductions by means of the General Agreement on Tariffs and Trade, known as GATT. The result was a massive increase in world trade and, no coincidence, world prosperity. In 1953 world trade totaled about $167 billion. By 1970 the figure was $639 billion. And the unsustainable American lead in global GNP returned to its pre-war level by 1965 as the other great powers recovered.