History regularly shows that basing economic policy upon ideology, hunches, and gut instinct, rather than on sound economic analysis, is a recipe for disaster. When policymakers have ignored well-established economic principles and instead tried to upend the status quo without good reason, the results have been catastrophic.
That bodes poorly for President Donald Trump’s tariff policy, which experts warn will both raise prices and lead to an economic slowdown as other economies impose reciprocal tariffs on American exports. Given the historical experience it is worrying to hear economists argue that Trump’s tariffs have raised the odds of stagflation—heightened inflation and recession—to a level not seen in the last half century. Whether he backs off from tariffs or doubles down, the damage to domestic and international confidence in the U.S. may have already been inflicted.
Policymakers have been falling prey to the lure of ignoring sound economics for centuries.
In 1787, right after the ratification of the Constitution, the U.S. government charted the Bank of the United States. The brainchild of Alexander Hamilton, the Bank carried out some of the functions of a modern central bank, such as managing the money supply and undertaking a rudimentary form of macroeconomic policy and bank regulation. Founding fathers Thomas Jefferson and James Madison, who were initially skeptical of the Bank, eventually warmed to the idea as it reached the end of its 20-year charter in 1811. Unfortunately, a divided Congress was unable to pass a renewed charter and, without a charter, the Bank was forced to close.
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Five years—and one major panic—later, Congress passed, and President Madison signed a bill establishing a new Bank of the United States, known to historians as the Second Bank of the United States. The Bank’s second incarnation, run by Nicholas Biddle, scion of a prominent Philadelphia family and Princeton valedictorian, was even more sophisticated and effective than the first. Like today’s Federal Reserve, the Bank undertook a basic form of countercyclical monetary policy, stimulating the economy when it was slowing and restraining it when it was overheated. This contributed to a period of relative financial stability and robust economic growth during the turbulent early years of the country .
When the Second Bank’s charter was due to expire in 1836, Congress saw the Bank’s merits and, at its request, passed a recharter bill in 1832.
Unfortunately for the Bank, the recharter bill ran into opposition from one of President Trump’s heroes, President Andrew Jackson. Jackson understood that the Bank had helped promote economic growth, but he opposed the Bank and personally disliked Biddle. Jackson, a frontiersman with limited formal education and a reputation as a dueler and a brawler, had a deep mistrust of those he viewed as entrenched elites—including the educated, refined Biddle—not unlike many of Trump’s followers today.
Jackson disregarded sound economic reasoning, common sense, and the entreaties of Bank supporters and vetoed the recharter bill. Congress lacked the votes to override the veto, the Bank’s charter lapsed, and it soon disappeared from the scene. The absence of the Bank’s restraining hand on the rest of the banking system allowed individual banks to overissue bank notes, which fueled inflation. This lack of restraint left the U.S. vulnerable to boom-bust financial crises, which plagued the country for the remainder of the century.
Policy blunders like the one Jackson made were not limited to the U.S. or to the 19th century. In the 50 years before World War I, many countries adopted the gold standard, under which they fixed the exchange rate between their currency and gold. This meant that they were limited in the amount of money they could print by the stock of gold they held, in theory creating a stable money supply but dramatically limiting the scope of what policymakers could do to help the economy during recessions. Nowhere did the gold standard develop a more distinguished pedigree than in Britain, which established it in the 1700s and maintained it almost continuously until World War I.
Most countries suspended the gold standard during the War but returned to it afterward.
In Britain, in 1925, Winston Churchill, the Chancellor of the Exchequer (the British equivalent of the Secretary of the Treasury), decided that it was time to rejoin the gold standard at the exchange rate that had prevailed before World War I. Economists, however, raised concerns about the prospect. Because of high inflation during the War, returning to gold at the old exchange rate overvalued the British pound, which risked decimating Britain’s export industries, forcing employers to impose huge wage cuts, and impoverishing British workers.
The argument against the return to gold was made by the most famous economists of the day, Sweden’s Gustav Castel and Britain’s John Maynard Keynes. Keynes even made his case in person at a private dinner party hosted by Churchill shortly before the return.
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Yet, Churchill decided to ignore them, not because of any particular economic reasoning or evidence, but because of nostalgia, British pride, and his traditionalist ideology. Many British policymakers believed a return to gold was a return to the 19th century heyday of the British Empire. After Churchill announced the move, the Economist echoed these sentiments, writing that “The war, with its temporary interruption of our mutual affairs, is over. ” Great Britain had “the honor to pay” debts in their “accustomed manner.”
The results were disastrous. The British economy was sluggish compared with those in the U.S. and Europe during the 1920s. GDP in the U.S. and Europe grew by between 40% and 50% during the decade prior to the Great Depression; meanwhile, the British economy grew by less than 20% and was characterized by contemporaries as being in “the doldrums.” British workers, faced with wage cuts, launched a general strike in 1926 that lasted nine days, and Britain’s coal miners went out on strike for several months. Keynes’ revenge came in the form of a pamphlet entitled: The Economic Consequences of Mr. Churchill. Despite the damage, British officials kept their country on the gold standard until 1931, when they were forced off by a financial crisis.
Today, Trump threatens to make a mistake in the mold of Jackson’s choice to veto the recharter of the Second Bank of the United States and Churchill’s decision to return to the gold standard.
Like these earlier decisions, Trump’s fixation on tariffs comes mostly from his own prejudices, not from any sound economic theory. He venerates late 19th century America with its high tariffs, which he claims helped propel the U.S. to wealth—despite historians dismissing this flawed understanding of the past. He has also arbitrarily decided that he does not want the U.S. to run a trade deficit with any country.
Yet, economists have warned that this makes no sense. If the U.S. runs a surplus with one trading partner and an equally sized deficit with another, our overall trade will be in balance. To put it in everyday terms: it is perfectly fine to run a deficit with your grocer, as long as your credit with your employer is large enough to pay your bill.
The lesson of the past is that ignoring experts and stubbornly persisting in his new tariff regime will prove catastrophic for the economy. Unlike previous policymakers, Trump still has a chance to avoid doubling down on his blunder. It might be optimistic to expect that Trump will back down on tariffs, although the 90-day pause he enacted on tariffs with China does give him an opening to do so—but he should. As John Maynard Keynes once said: “When I am wrong, I change my mind—what do you do?”
Richard S. Grossman is the Andrews professor of economics at Wesleyan University and the author of WRONG: Nine Economic Policy Disasters and What We Can Learn from Them (Oxford).
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