The Magazine

TRADING DOWN

Apr 13, 1998, Vol. 3, No. 30 • By DAVID FRUM
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The answer is that Fordney-McCumber was indeed a catastrophe that can fairly be said to have caused the Great Depression -- but conservatives prefer to avoid saying so because they want desperately to vindicate the once- vilified tax-cutting administrations of Warren Harding and Calvin Coolidge. The tariffs of Harding and Coolidge must be innocent, and therefore the Smoot- Hawley tariff signed by the tax-raising Herbert Hoover must be guilty.


Hoover's economic record is indeed appalling. But we ought not to blind ourselves to the consequences of the blind economic isolationism of his predecessors. At the end of the First World War, the bloodied and starving Europeans desperately needed things they could get only from America: food to feed their people and machines to rebuild their factories and farms. To obtain those things, they needed dollars, and the only way to get dollars was to sell European goods in America. But the tariff of 1922 had slammed the door.


Unable to export to America, the Europeans -- with the active support of the U.S. government -- began borrowing instead. Huge loans were made to German companies and German towns, and loans very nearly as big were floated throughout the rest of the continent as well. This massive borrowing threatened to drive up the value of U.S. currency on international money markets, and the Federal Reserve held down the rising dollar in the only way it could, cutting interest rates in the 1920s to nearly zero. That will start a pretty good economic party, and off the Twenties roared.


Buchanan is thus right that high tariffs in some sense drove the prosperity of the 1920s. But it was a precarious prosperity. Ultra-low interest rates invite inflation, and by 1929 the Federal Reserve was forced to hike rates in order to stabilize prices. In the United States, that triggered the recession of 1930. In Europe, the effect was horrific. Thanks to Fordney-McCumber, the European economies were all built on colossal debt to the United States. The Germans in particular were not only borrowing to buy what they needed; they were soon borrowing to pay the interest on prior borrowings.


Without access to the world's richest markets (the British had turned protectionist in the 1920s, too), and without much of an internal market after the inflation of 1923 wiped out what remained of domestic savings, the German economy failed. When the rise in American interest rates in 1929 brought money flooding back from Europe, German borrowers began to default -- which wiped out deposits in the American banks that had lent to them -- which forced those banks to recall their domestic loans -- which bankrupted borrowers across the United States. By the time it all ended in 1933, the American money supply had contracted by some 25 percent and one in four Americans was out of work.


As the victim tumbled down the stairs, Senator Smoot and Congressman Hawley gave him a kick to hurry his progress. But the fundamental error had been made with the Fordney-McCumber tariff eight years before.


After 1945, America applied the lesson it had learned in 1922. But Buchanan -- and Ross Perot and the steel companies and the AFL-CIO, not to mention the trade hawks of the Department of Commerce and the protectionist Washington think tanks and lobby groups -- forgets what that lesson fundamentally was. America is like a fat man on a park bench: If he sits on the wrong spot, he upends the bench like a teeter-totter, and not just his trading partners but he himself lands hard. The prosperity of the United States is inescapably related to that of the rest of the world.


And it always has been so. America has always been a great trading nation: a great importer, a great exporter, a great borrower, a great lender. This is not dependence or a derogation from national sovereignty. It is commerce. At the very end of The Great Betrayal, Buchanan drops some hint that he understands all this -- that he realizes America's connections cannot be severed. He just does not like them.


The man is entitled to his preferences and aversions, but he ought not to pretend that his preferences would enrich the country when the evidence is so overwhelming against him. It is Pat Buchanan, not the free traders, who wants to reduce the standard of living of the average citizen in the name of an abstract ideological project. He hopes to persuade America's conservatives to follow him. It would be suicide if they did -- for them, for the country, and for the world economy.




David Frum is a contributing editor to THE WEEKLY STANDARD.