When History Rhymes: How 1930s Economic Mistakes Are Being Repeated Today

A leading economist warns that current trade and fiscal policies eerily mirror the policy disasters that deepened the Great Depression. Here's why the parallels should terrify investors.

Key Takeaways

• Current tariff policies mirror the disastrous Smoot-Hawley Act that worsened the Great Depression through global retaliation
• Trump's attacks on Fed independence echo Andrew Jackson's war against the central bank, threatening inflation control mechanisms
• Business uncertainty from "bold experimentation" is recreating the same confidence-destroying environment that prolonged 1930s recovery
• Fiscal dominance risks are approaching dangerous levels as deficits explode while monetary policy loses independence
• Trade deficit misconceptions drive retaliation against low-tariff countries based on flawed economic logic
• Dollar's reserve currency status faces gradual erosion even without immediate replacement threats
• Tariffs create one-time supply shocks that reduce output without causing persistent inflation unless monetary policy accommodates
• The "big beautiful bill" represents fiscal irresponsibility at precisely the wrong economic moment
• New Deal research reveals that anti-business rhetoric and policy uncertainty severely damaged recovery prospects
• Economic nationalism threatens the global cooperation that underpins long-term prosperity and growth

The Economist Who Sees Through Political Spin

George Selgin doesn't mince words about the current economic trajectory. As a longtime scholar at the Cato Institute and author of the new book "False Dawn: The New Deal and the Promise of Recovery, 1933-1947," he brings a unique perspective that cuts through partisan narratives to examine what actually works - and what doesn't - in economic policy.

What makes Selgin's analysis particularly compelling is his willingness to challenge orthodoxies on both sides of the political spectrum. His latest book surprised many by positioning John Maynard Keynes as something of a hero in the New Deal story - not because Keynes was right about everything, but because his advice to Franklin Roosevelt was far more sensible than what the administration actually implemented.

This intellectual honesty carries through to his assessment of current policies. Selgin describes Trump's economic approach as "pretty dreadful," particularly the trade policy which he calls "a disaster." But these aren't partisan attacks - they're the conclusions of someone who has spent decades studying what happens when governments make similar mistakes.

• Historical perspective advantage: Selgin has taught courses on the Great Depression and New Deal, giving him deep familiarity with policy parallels that most commentators miss
• Nonpartisan analysis: His research led him to praise Keynes while criticizing both extreme pro- and anti-New Deal positions, showing intellectual independence
• Real-world observation: Living in Spain, he experiences firsthand the dollar's decline as his purchasing power drops 10% in recent months
• Policy consequence focus: Rather than political positioning, Selgin emphasizes how specific policies affect business confidence, investment, and long-term prosperity
• Book timing significance: Publishing detailed New Deal analysis just as similar policy patterns emerge provides crucial historical context for current events

The parallels Selgin identifies aren't superficial political comparisons but fundamental patterns in how economic policy affects business confidence, investment decisions, and ultimately recovery from economic downturns. His work suggests we're repeating mistakes that took years to undo in the past.

The Smoot-Hawley Sequel: When Tariff History Repeats

The most alarming parallel Selgin identifies is between current tariff policies and the Smoot-Hawley Act of 1930, which helped deepen and prolong the Great Depression. What started as Herbert Hoover's modest attempt to help struggling American farmers became, through congressional logrolling, a comprehensive tariff increase that triggered global retaliation.

The mechanics of how Smoot-Hawley unfolded offer a disturbing preview of current trade policy. Congress expanded Hoover's limited agricultural protection into wide-ranging tariff increases across industries. Other countries responded with their own reciprocal tariffs. The result was a global tightening of trade terms that made everyone poorer.

Trump's approach follows an eerily similar pattern, but with even less economic logic. The fundamental error is conflating trade deficits with unfair trade practices, leading to retaliation against countries with low tariffs simply because America imports more from them than it exports.

• Deficit-based targeting flaw: The administration retaliates against countries with 2% tariffs using the same 25% tariffs applied to high-barrier nations, ignoring actual trade policies
• Causation confusion: Trade deficits stem from complex factors including savings rates, currency values, and economic development stages - not just tariff policies
• Retaliation inevitability: Just as in the 1930s, other countries respond with their own trade barriers, creating a downward spiral that hurts everyone
• Business uncertainty multiplication: Companies can't plan investments when they don't know what trade policies will look like next month or next year
• Supply chain disruption: Modern economies are far more internationally integrated than in the 1930s, making tariff impacts more severe across production networks

The economic consequences are already visible despite implementation delays. Markets drop when Trump announces new tariff plans, then recover when implementation gets postponed. This cycle of threat-and-reprieve creates the very business uncertainty that Selgin identifies as recovery-killing.

What makes the current situation potentially worse than Smoot-Hawley is the complete absence of economic understanding behind the policies. At least Hoover had specific goals for helping farmers. Trump's team appears to genuinely believe that any trade deficit indicates unfair foreign practices, leading to threats against allies and trading partners regardless of their actual policies.

Central Bank Independence Under Siege

Perhaps no parallel is more concerning than the comparison between Trump's attacks on Federal Reserve Chairman Jerome Powell and Andrew Jackson's war against the Second Bank of the United States. Both represent fundamental challenges to the principle that monetary policy should be insulated from short-term political pressures.

Selgin emphasizes that Fed independence has always been somewhat limited - presidents routinely pressure central bank chairs to accommodate their preferences. But Trump's approach is far more overt and aggressive than the behind-the-scenes influence attempts of previous administrations.

The stakes couldn't be higher. While politicians naturally prefer lower interest rates and higher inflation to make government borrowing easier and reduce debt burdens, someone needs to take responsibility for controlling inflation. In the American system, that responsibility falls almost entirely on the Federal Reserve.

• Presidential bias problem: All presidents prefer lower rates and higher inflation because it makes fiscal policy easier and reduces real debt burdens
• Sole inflation responsibility: No other government institution is positioned to control inflation, making Fed independence crucial for price stability
• Fiscal accommodation pressure: The Fed must compensate for excessive deficit spending by tightening monetary policy, creating natural tension with fiscal authorities
• Recent inflation reminder: Americans just experienced a painful bout of inflation and didn't like it, making further outbreaks politically dangerous
• Connection invisibility: Most people won't connect future inflation to current Fed independence erosion, allowing political interference to continue unchecked

The broader context makes Fed independence even more critical. With fiscal policy becoming increasingly expansionary through massive spending bills, monetary policy represents the only brake on inflation. If political pressure prevents the Fed from raising rates when necessary, the result is predictable: more inflation, more economic instability, and ultimately worse outcomes for everyone.

Selgin's historical perspective reveals that this isn't theoretical. When central banks lose independence, inflation follows. When inflation takes hold, it becomes much harder to control, requiring even more painful adjustments later. The short-term political benefits of pressuring the Fed come at enormous long-term costs.

Fiscal Dominance and the "Big Beautiful Bill"

The concept of fiscal dominance represents one of the most serious but least understood threats to economic stability. It occurs when fiscal policy becomes so expansionary that monetary policy loses effectiveness, forcing the central bank to accommodate deficit spending regardless of inflationary consequences.

Selgin warns that the United States is "very much flirting with that sort of situation" and describes recent legislation, including Trump's "big beautiful bill," as "very irresponsible" given current fiscal conditions. The problem isn't just the size of current deficits but their trajectory and the limited tools available to address them.

Unlike some economists who minimize fiscal risks by pointing to the government's ability to create money, Selgin emphasizes the inflation constraint. Modern Monetary Theory advocates correctly note that governments with sovereign currencies can always meet their obligations, but they downplay the inflation consequences of unlimited money creation.

The timing makes current fiscal expansion particularly dangerous. This isn't a recession requiring stimulus or a crisis demanding emergency spending. It's expansion during a period when the economy doesn't need additional demand and when inflation remains a concern.

• Fiscal dominance threshold: Multiple analytical studies suggest the U.S. is approaching dangerous levels where fiscal needs could overwhelm monetary policy independence
• Interest rate spiral: As debt levels rise, higher interest payments become a larger component of deficits, creating a self-reinforcing cycle
• Limited fiscal space: Unlike periods when deficits were more manageable, current levels leave little room for necessary stimulus during actual emergencies
• Political spending bias: The bill contains "usual large components of pork and waste" rather than targeted, necessary investments
• International context: Other countries may have more fiscal space, but the U.S. faces unique constraints as the world's reserve currency issuer

The comparison to post-COVID fiscal confidence is particularly troubling. Selgin suggests that because emergency spending "worked" during the pandemic, politicians have become more comfortable with large deficits. But pandemic conditions required exceptional measures that don't apply to current circumstances.

Dollar Vulnerability Despite Dominance

One of Selgin's most nuanced analyses concerns the dollar's international status. While he doesn't expect imminent displacement by other currencies, he warns of gradual erosion that could have severe consequences for American fiscal flexibility.

The dollar remains dominant in international trade and reserves, but its percentage is declining as other countries diversify their holdings. More importantly, the dollar is losing its special status as the most trusted currency, which creates exceptional demand for U.S. debt.

This erosion has immediate practical implications. Selgin notes his personal experience in Spain, where his dollars buy 10% less than they did a year ago. For Americans, this means higher costs for international travel, imported goods, and foreign investments.

• Diversification trend: Countries are reducing dollar concentration in reserves without necessarily switching to alternatives like the yuan or euro
• Trust premium loss: The dollar's special status as the most trusted currency creates extra demand that may be diminishing
• Debt sustainability impact: Reduced foreign demand for dollar-denominated debt will make deficit financing more expensive and difficult
• Interest rate implications: Higher borrowing costs feed back into deficit growth through increased debt service payments
• Self-reinforcing decline: As fiscal problems worsen, international confidence in the dollar may decline further

The connection to fiscal and monetary policy makes dollar vulnerability particularly concerning. Excessive deficits and political pressure on the Fed both undermine international confidence in American economic management. Countries holding dollar reserves want assurance that American policies will maintain the currency's value over time.

Selgin emphasizes that this isn't about immediate catastrophe but about gradual erosion of advantages that have allowed the United States to run larger deficits and maintain lower interest rates than would otherwise be possible. As those advantages disappear, adjustment becomes more painful and options more limited.

Business Confidence and the Recovery Paradox

Perhaps Selgin's most sophisticated insight concerns the role of business confidence in economic recovery. His research on the New Deal reveals how policy uncertainty and anti-business rhetoric can undermine recovery even when some individual policies might be beneficial.

This connects directly to current conditions. Trump's "mercurial" nature and unpredictable policy announcements create the same kind of business uncertainty that prolonged the 1930s depression. Companies can't make long-term investment decisions when they don't know what policies will be in place next month.

The New Deal parallel is particularly instructive. Roosevelt's administration implemented some helpful measures, especially early banking reforms that restored confidence. But later policies created enormous uncertainty about regulations, taxes, and government intervention in business operations.

• Investment planning disruption: Businesses need predictable policy environments to make multi-year investment decisions
• Regulatory uncertainty: Constant policy changes make it impossible to calculate returns on potential investments
• Anti-business rhetoric impact: Even if policies don't directly harm companies, hostile language from government officials creates defensive mindsets
• Bold experimentation dangers: Roosevelt's approach of trying many different things simultaneously created chaos rather than confidence
• Confidence recovery requirements: As Keynes advised Roosevelt, recovery requires making businesspeople "feel loved" rather than threatened

The modern application is clear in market behavior. Every time Trump announces major policy changes, markets react negatively to the uncertainty even when specific policies might have some economic logic. The threat-and-reprieve cycle around tariffs exemplifies this dynamic.

Selgin's research suggests that stable, predictable policies often work better than theoretically superior but constantly changing approaches. Business confidence requires consistency more than perfection.

The Path Forward: Learning from Historical Mistakes

Selgin's analysis offers both warnings and potential solutions based on historical experience. The key insight is that policy mistakes compound over time, creating problems that become much harder to solve than they would have been to prevent.

The current situation isn't hopeless, but it requires recognizing the parallels to past mistakes and changing course before they become entrenched. This means abandoning tariff escalation, respecting Fed independence, controlling deficit growth, and creating predictable policy environments that support business investment.

The alternative is continuing down a path that historical analysis suggests leads to reduced prosperity, increased economic instability, and ultimately worse outcomes for everyone. The 1930s experience shows that it can take years or even decades to undo the damage from misguided economic policies.

• Policy predictability importance: Businesses and markets need stable, understandable rules more than they need specific policy outcomes
• International cooperation benefits: Global trade and cooperation create prosperity despite short-term adjustment costs for some sectors
• Institutional protection necessity: Fed independence and other institutional safeguards exist because they produce better long-term outcomes
• Fiscal responsibility timing: Controlling deficits during good times provides flexibility for necessary spending during crises
• Historical learning requirement: Understanding past policy mistakes can prevent their repetition under different circumstances

The broader lesson from Selgin's work is that economic policy isn't just about immediate political benefits but about creating conditions for long-term prosperity and stability. The policies that feel good in the short term often create the most problems over time.

As Selgin notes, the biggest concerns may not even be economic but cultural and institutional. The movement toward economic nationalism and away from international cooperation threatens the foundations of the prosperity that made America attractive to striving people worldwide.

The choice facing policymakers isn't between perfect and imperfect options but between approaches that have historically worked and those that have historically failed. Selgin's research suggests we're currently choosing the approaches that have failed, with predictable consequences that may take years to fully unfold.