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Memories of the 28th Century

War by Another Name

Rating: 2 votes, 5.00 average.
Wars are examples of diplomacy failing. Trade wars are one form of war, and they can be a harmful as shooting wars. The Great Depression was caused by a trade war, and we may have a similar event in the near future.

The history books don’t have much about it, but there nearly was a shooting war between the U.S.A. and the UK in the 1920’s. London had been the primary center of international finance since the Seventeenth Century. Debt and equity were issued and traded there more than in other places, and sovereign debt was issued there in addition to in the country that was issuing the debt. Between commissions and profits, London and the UK did very well from the business. That changed during the Great War. International financial activity decreased tremendously, and the British government had to issue more debt to pay for the war. The financial business, and the sovereign gold largely moved to the U.S.A.

By the end of the Great War the U.S.A. held a huge amount of European debt with France and the UK being the biggest debtors. This debt was strong leverage over Europe, and the Brits were not accustomed to being second fiddle, especially in financial matters. The Allies suggested that the U.S. lend money to Germany that Germany would use to pay reparations to the Allied powers, and those countries would use the reparations to pay down what they owed the U.S. That would have helped the Allies, but it would have left the U.S. in the same position of being a large creditor to European countries. The U.S. gave thumbs down.

In addition to the debt situation, London had been the center of world financial markets before the Great War, but by going into debt to the U.S. the Brits lost their pre-eminent position, and the U.S. gained the top position in world finance. The U.S. also became the world’s primary manufacturer, because its factories hadn’t been damaged by the war. U.S. trade also became somewhat more protectionist

Even with planned disarmament in the Washington Conference, the UK added two battleships in 1927, and the U.S.A. added three aircraft carriers, rather than battleships that were banned by the treaty. There were pressures for the Brits to try to re-establish their financial dominance, but the idea of using force was not pushed hard. The British gold reserves had been depleted during the war, and there was no practical way to get that back, except through international trade. There were rumors of war, but there was no movement in that direction, except in protective tariffs.

The Smoot-Hawley Act is usually the only increase in tariffs mentioned, but there was the Emergency Tariff Act of 1921, which protected agricultural goods (see link below), and the Fordney–McCumber Tariff of 1922, which increased tariffs on many manufactured goods. "The tariff law raised the American ad valorem tariff rate to an average of about 38.5% for dutiable imports and an average of 14% overall." The overall average is a significant number, and it can be considered very protectionist. From 1921 on the U.S. was protectionist, and it should not be surprising that protectionism eventually led to a reduction in trade.

So where is this going? I contend that a long history of protectionism and a threatening aspect of the U.S.A. led to the Great Depression, when exports decreased and financial assets lost value due to illiquidity. And I think that process is going on now. After the next depression I think we will point at Trump increasing the tariff on solar panels as the first shot in a trade war that is likely to lead to a serious worldwide slow down in trade. We have to take care that this doesn't become a shooting war, but there is little desire by world leaders to use weapons, but there are some loose cannons, including one in the Oval Office.

The use of tariffs to punish the Chinese was not a good choice. China holds a huge amount of U.S. debt, and they could dump some on the market to raise U.S. interest rates dramatically. That would raise rates by requiring the U.S. to raise the return on Treasuries and other debt obligations to attract buyers. China would decrease the value of an asset that they hold in great quantity, but it probably would be worthwhile to them.

It is possible that the U.S. has given preferred status to too many trading partners, but throwing a 30% tariff on one partner who has annoyed you isn't good trade policy. I am opposed to "free trade"; trading partners should pay for services they use and throw something into the general fund. The U.S. used tariffs to generate a substantial part of its income for long periods of time, but the tariffs were in the five to ten percent range. Fifteen percent is where tariffs start to become protectionist and thirty percent is punitive.

On the other hand, if Trump was trying to slap the wrists of the ACC movement, then he might succeed. But that would be too clever for him.

I have only touched the surface of this matter and the history. The relevant history is rather obscure, but it can be found, if one searches carefully. How far protectionism will go now is an open question, but there is a significant gap between free trade and protectionism.

An excellent article about the economic pressures


  1. kiz_paws's Avatar
    Fascinating writing, Peter.
    You make this complex issue easy to follow with your writing talent. Thank you.
  2. PeterL's Avatar
    It is a fascinating subject. I'm glad you liked it, but there is so much more involved both in the history and inwhat is going one now that this seems like a title of a longer work, but it is difficult to find the information from the 1920's. I hope that history is not repeating.
  3. kiz_paws's Avatar
    I hope that history is not repeating