“They’re an act of war, to some degree.” —Warren Buffett interviewed about tariffs on CNN
“Those that fail to learn from history are doomed to repeat it.” —Winston Churchill
“I never make the same mistake twice. Instead, I make it five or six times just to be sure.” —Anonymous
Big increases in tariffs have been tried twice before in American history. It’s worth knowing what happened.
In 1890 Congress passed the Tariff Act of 1890. The bill was sponsored by Republican Congressman William McKinley and became known as the McKinley Tariff Act. The tariffs were very unpopular and resulted in McKinley losing reelection by a landslide. In fact, the losses in the election were historic, with the Republicans losing over 90 seats in the House.
The bill raised tariffs on imported goods to an average of 50 percent. Interestingly, imported luxury goods were exempted.
The effect of the new tariffs was not only the increased price of imported goods but domestic goods as well. The perceived benefits of tariffs are to protect domestic industry in hopes that it can grow and prosper, while at the same time increase government revenues. Tariffs are a tax and the experience of the 1890s is that it was a tax on the working class, as the cost of essential goods rose so high that it became impossible for many families to make ends meet.
It’s interesting that the bill exempted imported luxury goods. Clearly, this meant that for those who could afford to buy imported luxury goods, prices didn’t rise. This favoritism towards the wealthy was a theme in the rise and sudden end of William McKinley.
After the crushing electoral defeat in 1892, McKinley came back with astonishing strength to become elected president in 1896. During his presidency, the United States was in a period now known as the Gilded Age. President Trump says that McKinley is his favorite president. Perhaps that’s why he has said that we will now enter a “golden age”—his modern conversion of the Gilded Age label. And perhaps Trump’s admiration for McKinley explains his love of tariffs.
In the end, it was the damaging toll of tariffs on the working class that motivated Leon Czolgosz to assassinate McKinley in 1901.
McKinley’s tariffs were perceived as favoring wealthy industrialists, who were labeled by the press as the “robber barons.” By the end of McKinley’s presidency, he had reversed his position on tariffs and championed global free trade.
But despite this, the Republican Party didn’t give up its love of tariffs. The second big increase came during the Hoover administration. The infamous Smoot-Halley Tariff Act was passed in 1930. The misguided thinking that led to its passage was that it would protect American business from foreign competition and lead to a recovery from the recession/depression that had started the previous year. Instead, it’s widely credited with accelerating the collapse of the American economy, as it led to trade wars, especially with Britain.
President Trump is famous for saying that win-win is a myth; there are only winners and losers. But sometimes everyone loses. That’s what happened in the 1930s, and tariffs played a big part in that.
I recommend reading the history of the McKinley presidency and the effect of tariffs—it’s fascinating. So many of the arguments being made today for the big increase in tariffs were made then. The impact was higher prices for both imported and domestic goods. The cost of living rose 25 percent.
In that time, as well as in the 1930s, tariffs were catastrophic for farmers. Our farmers are responsible for massive amounts of exports. In the 1890s and the 1930s, the effect of trade wars was that farmers ended up getting lower prices for their products because they couldn’t be sold overseas after tariffs were added to the price. As a result, in the 1930s, Kansas wheat farmers burned their crops in the fields because it cost more to harvest and ship than the crop was worth.
Trump, whose Manhattan home is a gilded penthouse, has a clear affinity for the Gilded Age. But that period was only a golden age for the very wealthy.
Peter Navarro is a Harvard-educated economist who is a senior counselor to the president. He knows this history, but clearly neither he nor the president has learned from it.
As a young Peace Corps volunteer, Navarro saw firsthand that foreign markets are not fair in the way we think of fair markets. In his books, he promotes tariffs as the tool for leveling the playing field. I’m surprised that he chooses to ignore the history of tariffs, in particular the experience of McKinley, who twice—as a Congressman and as a president—imposed tariffs. The results were spectacularly negative. It’s no surprise that before his death, he ended up organizing groups of nations to facilitate trade and lower barriers. If not exactly free trade zones, they were at least lower tariff zones, and McKinley, at the time of his assassination, was working to bring the world closer to free trade.
Fifty years ago, when I was in college, I was taught that the Smoot Halley Act was the immediate cause of the Great Depression. But there were plenty of mistakes made. The relatively novice Federal Reserve Bank raised interest rates instead of lowering them, and President Hoover thought that a balanced budget might be a cure to the deepening economic crisis, and so raised income taxes from 25 to 65 percent. I have no doubt that both of those actions had greater and deeper negative effects than the tariffs. But I have no question that tariffs were yet another mistake that took the nation deeper into economic crisis.
Our situation is more similar to the McKinley era than the 1930s, but my research shows that any benefits derived from tariffs were far outweighed by the problems they created in both eras.
Whatever lessons Navarro and Trump derived from McKinley’s experience, they were not the lessons McKinley himself learned. Why else would McKinley emerge from the experience as a champion of free trade? I know better, but I’m tempted to believe Trump and Navarro stopped reading the history of William McKinley halfway through the book.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal@getyourinsight.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.