The Perils Of Free Trade

It is absurd to call the Smoot-Hawley Tariff the prime cause for the Great Depression, which was precipitated by the real-estate and stock-market busts. Tariffs had nothing to do with it.

“Free trade being necessary for national prosperity” is given the lie by what got the U.S. economy booming after the Great Depression—war production. Huge government deficits financed U.S. home production but didn’t hurt the economy because the “money” was invested in production.

Our deficits today are a killer because they finance nonproduction. Adam Smith himself debunked the mercantilist philosophy that gold is wealth. “Production is wealth,” roared Smith. He encourages free trade only when it results in high wages and low profits at home. That occurs, in part, if the lower imports’ costs are the result of natural advantages such as climate, soil, minerals, et cetera. However, our consumer-electronics home production, for example, was not extinguished because of any natural advantages abroad but rather because of the low wages there.

Finally, production equals national security. After free-trade agreements result in shifting vital U.S. industry abroad, whom are we going to call in the next war? Our huge nonproductive service industry? Mexico City? Tokyo? Berlin? Wake up, folks!

John Steele Gordon replies: Mr. Armstrong excoriates me for mindlessly appealing to the authority of Adam Smith in support of my argument and then proceeds to appeal to the authority of—guess who—Adam Smith in support of his own.

I certainly agree that a tax on wages is, in Smith’s phrase, “absurd and destructive.” But the United States is hardly the only nation to indulge in the absurdity. In fact all our major trading partners impose taxes on wages, often at far higher rates. Further, the income-tax component of American goods is nowhere near the 30 to 40 percent that Mr. Armstrong implies.

As for Mr. Rauchle, I wrote that Smoot-Hawley was perhaps the single greatest cause of the Great Depression. (Fudge is every historian’s favorite candy.) But Mr. Rauchle’s candidates, the banking and stock market collapses, surely were not .

The banking collapse was largely the inevitable result of American’s Jeffersonian phobia about banks, which resulted in thousands of one-branch operations with narrow deposit bases and undiversified loan portfolios, a sure-fire recipe for disaster in hard times. The Fed, meanwhile, was legally unable to help the liquidity problems of thousands of sound banks that were in the Federal Reserve system.

As for the stock-market collapse, it was an effect not a cause. Blaming it for the Depression is like blaming the barometer for the hurricane.

The facts are these. The American economy is larger than ever. The manufacturing sector of it is strong, growing, increasingly export-driven, and, in industry after industry, increasingly the world’s low-cost producer, highwage burden and all. Thus the ultimate purpose of America’s free-trade policy is not to give foreign manufacturers of cheap goods access to our markets but to give American manufacturers access to theirs. Once we have it, we’ll eat them alive. They know it; that’s why they’re so reluctant to lower their trade barriers.

If Mr. Armstrong and Mr. Rauchle don’t care for Adam Smith, perhaps they should listen to another renowned authority, one who told the truth sixty years ago when the economic future of this country was in far graver doubt than it is today: “The only thing we have to fear is fear itself.”