by Pierre G. Villere
The headlights are pointed uphill. After weeks and months of an economic shutdown, artificially imposed by the necessity to quarantine and therefore close virtually all business activity, the U.S. and global economies are slowly re-awakening. Countries all over the world are taking phased approaches to re-opening, with constant monitoring of Covid-19 outbreaks to avoid spikes or recurrences. And as I have written previously, my view today is very different than it was in early to mid-April; I think the damage has been far greater, and runs much deeper, than I expected back then. The impact of this multi-month shutdown will take a far longer period of time to recover from, although the construction industry recovery may outpace other sectors of the economy.
But I worry about the lessons of economic history, which are eerily similar to the current economic landscape, as the tariffs imposed by the current administration could throttle our recovery. I hope the Trump administration will use the lesson of the Great Depression, and avoid the one-two punch we suffered then by rolling back tariffs and promoting free trade.
The onset of the Great Depression was caused by a single event, much like the current Covid-19 crisis that hit us so swiftly. In October 1929, the Great Stock Market Crash came about because margin requirements were only 10 percent; brokerage firms would lend stock market speculators $9 for every $1 they had deposited, so when the market fell, brokers called in these loans. The speculators could not cover the margin calls, as all the profit in the stock value had been erased. Banks began to fail as debtors defaulted, and runs on banks led to subsequent bank failures, erasing billions of dollars in assets.
Against the backdrop of this epic event was the promise that Herbert Hoover made in his 1928 presidential campaign, which was to protect the booming American economy against imports by imposing tariffs. Looking back at the late 1920s, the U.S. economy had made exceptional gains in productivity because of electrification, which was a critical factor in mass production. Also, horses and mules had been replaced by motorcars, trucks, and tractors. One-sixth to one-quarter of farmland, which had been devoted to feeding horses and mules, was freed up, contributing to a surplus of farm production. As a result, the ability to produce exceeded market demand.
As the global economy entered the first stages of the Great Depression in late 1929, the main goal of the U.S. was to protect its jobs and farmers from foreign competition. Leaders in Congress championed a significant tariff increase to afford those protections, an ill-conceived law that became the Smoot-Hawley Tariff Bill. Opposition to the legislation was fierce: A petition was signed by 1,028 economists asking President Hoover to veto the legislation; even business leaders like Henry Ford weighed in, spending an evening at the White House trying to convince Hoover to veto the bill, calling it “an economic stupidity.”
But Hoover signed the bill to keep his campaign promise, which resulted in retaliation by other countries by enacting their own tariffs. The global flow of goods came crashing down. This trade contraction tilted what should have been a normal recession into the Great Depression, and it was only the significant increase in the production of war materiel in the late 1930s leading up to the preparations for World War II that brought the economy back to life.
There are too many similarities to the current situation: A sudden event, in this case a global pandemic instead of a stock market crash, followed by tariffs that only act to slow free trade. There is a significant flow of foreign goods into our ready mixed concrete industry, and likewise a significant amount of domestically produced plant and machinery that is exported to countries around the world. I hope the White House and Congress listen to the advice of so many economists who advise that the current wall of tariffs needs to come down now, when we need the relief the most … and avoid repeating the lessons of history.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.