Home Economic Trends The Revolution of 1948, and Its Reversal – Jeffrey Tucker (08/13/2019)

The Revolution of 1948, and Its Reversal – Jeffrey Tucker (08/13/2019)

Generations of Americans have taken the ideal of free trade for granted – until the Trump administration, led by the self-described “tariff man,” turned on it and replaced it with a mercantilist strategy. What began with hope for better deals has turned into the attempted imposition of a pre-modern form of economic planning. 

Down with imports. Up with exports. Trade deficits balanced by taxes on Americans masquerading as tariffs against foreigners. The ideal of cooperation between enterprises the world over is replaced with competition between states, funded via the printing press – as the president said directly in a Tweet.

The reversal is only 18 months old, but it is not panning out as planned. Trade deficits are up. Exports to China are down 19% for the year, while imports are down 12%. Direct foreign investment in the US has taken a dive. Businesses fear investment. Prices for many are rising. Many American businesses that depend on trade (which means, at some level, nearly all) are feeling the pain. Stocks are lower today than when the trade war begin in early 2018. International tensions are rising in all directions. 

That this would would be the result would not surprise to Cordell Hull (1871-1954), the 12-year U.S. Secretary of State, who bears most of the intellectual responsibility for what became the General Agreement on Tariffs and Trade that followed World War II. GATT marked a seachange in global economic affairs, the moment when nationalist-style protectionism gave way to international cooperation and the primacy of enterprise. It was the revolution of 1948 

For Hull, it was the fulfillment of a lifelong passion. His influence, born of theoretical and moral conviction, was felt intensely by a generation of diplomats and economists who swore following depression and war that international trade between all nations would be the best foundation for a future of peace and prosperity. 

It was through Hull’s efforts, backed by centuries of economic thought and a near consensus in the profession since the 19th century, that the United States led the world towards ever freer trade. It’s been this way for 85 years, beginning in 1934 and continuing through 2018 when the trade wars began. In all these years, hardly anyone imagined that it could go the other way. And yet presently, after nearly a century of experience, that precedent is rapidly swirling down the drain. 

The passion for more open, global, enterprise-driven markets came in the aftermath of World War I. “When the war came in 1914,” Hull wrote in his memoirs, “I was very soon impressed with two points… I saw that you could not separate the idea of commerce from the idea of war and peace…  [and] that wars were often largely caused by economic rivalry conducted unfairly.” After 1916, he wrote, “I embraced the philosophy that I carried throughout my twelve years as Secretary of State… From then on, to me, unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war.”

Though realizing that many other factors were involved, I reasoned that, if we could get a freer flow of trade ‐ freer in the sense of fewer discriminations and obstructions ‐ so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance for lasting peace.

He worked throughout the 1920s to realize the dream, but this was interrupted by the 1929 stock market crash, which panicked Congress into passing the Smoot-Hawley tariffs of 1930. Economists in the US and around the world were appalled, and signed a powerful letter of protest. It didn’t stop the protectionist wave but it did provide Hull with some intellectual momentum to reverse the damage. The change in party control in 1932 enabled work on what became the Reciprocal Trade Act of 1934, and for the Roosevelt administration to enact 20 separate bilateral agreements that granted “most favored nation” status to restart world trade. 

What the US did in these years inspired other nations. Hull, in pushing his dedication to free trade from his perch at the Department of State, had to overcome countless business interests, old hatreds between nations, and most of all the central planning ideology of John Maynard Keynes, who had long before turned against free trade. Indeed, Keynes had targeted Hull as an enemy in the 1930s and that stance persisted even after the Second World War. 

When in 1941 Keynes saw Hull’s first draft of a non-discriminatory, multilateral postwar trade deal, he exploded in a rage at the “lunatic proposals of Mr. Hull,” which he believed reduced the chances for a government-planned world economic system – one he undoubtedly hoped to administer. Hull’s alternative, which ultimately prevailed, was simply direct, non-discriminatory trade undertaken by the private sector, which seemed to Keynes nothing more than the old anarchy of the marketplace. 

Keynes denounced the draft as “a dogmatic statement of the virtues of laissez‐faire in international trade along the lines familiar forty years ago, much of which is true, but without any attempt to state theoretically or to tackle practically the difficulties which both the theory and the history of the last twenty years has impressed on most modern minds.”

Hull was relentless. His views in favor of cooperative global trade and minimal tariffs spread through the State Department and eventually prevailed in the Roosevelt Administration. When Hull retired in 1944, the cause was picked up by the even more radical free trader William Clayton, who served first as Assistant Secretary and then as Undersecretary of State for Economic Affairs. He came to head the Office of Trade Agreements. Two other free traders aided in the efforts: Harry Hawkins of the Division of Commercial Policy and Trade Agreements, and Clair Wilcox who had been an economics professor at Swarthmore College. 

It was Wilcox who was the lead negotiator in the 1947/48 treaty that became known as the GATT. And this is where the history of this becomes complete: it was Wilcox who drafted the 1930 protest letter by economists against Smoot-Hawley, the letter that garnered such passionate praise from E.C. Harwood, the founder of the American Institute for Economic Research. The entire time, from the 30s all the way through the fight for free trade in the postwar period, the famed economist John Maynard Keynes was nothing but an obstacle and an annoyance, a determined opponent to free and cooperative trade in favor of tariff policies and government planning. 

It took 18 years from the initial protest by economists against protectionist mercantilism in 1930 to realize the beginnings of the dream of peace and prosperity in 1948. The work, to turn from a confused and backwards looking protectionism to create and outward and intelligent trade policy that benefited the U.S. and world, took place due to intellectual commitment, strategic thinking, and moral courage. 

What did GATT do for the world? It lower tariffs, consistently so over the decades, starting with a near complete reversal of the protectionist logic behind Smoot-Hawley. Billions of people came to be emancipated from bureaucratic interference in their commercial decisions, as goods, services, and wealth grew the world over. A longer-term effect of the sweep of trade liberalization was the sweeping of communism out of both the Soviet Union and China and the liberation of vast swaths of Latin America, Asia, and Africa. The global production of goods has led to the global production of peace, exactly as predicted by Hull – and scores of post-mercantilist economists.

Here is the history of the gradual opening of the world in a single chart. 

And this in turn led to the economic integration of the globe.

But consider carefully here: the reason for this glorious revolution, one that brought billions out of poverty and gave us all today longer and better lives, began with the passionate push of an idea of free trade. It didn’t happen automatically. It took place against the objections of an interventionist establishment in the U.S. and U.K, entrenched business interests, an instinct for militarism, and politicians who imagined themselves to be rulers of the world. 

Reading this account gives one a sense of nostalgia for principled, educated, and courageous public servants who were driven by a sense of duty to the well-being of humanity. They knew full-well that the progress of nations is not a matter of competition between states, but rather the cooperation of individuals and enterprising firms the world over. 

They knew that unrestrained trade, and not tariffs or other policies interfering with it, are responsible for the peaceful pursuit of interests and the realization of longer and more fulfilled lives, which is the fundamental aspiration of everyone. Economists from diverse viewpoints as Paul Krugman and Russell Roberts agree upon this point: free and unfettered trade benefits everyone…except perhaps for those who don’t know, or benefit from, ignoring the past.

The revolution of 1948 was too important to history – and far too important to the present – to allow it to be sacrificed on the altar of error and ego of one highly confused man. The history books show, rightly, that the United States led the world toward freer markets and more ennobled lives around the world, for fully 85 years. We dare not relinquish that standing nor discredit that great achievement.