When the merchant-sovereign conflates two levers

According to CNBC's report, President Trump has doubled down on a threat to halt trade with the United States' top commercial partners unless the Federal Reserve reduces interest rates. I want to sit with the structure of that threat, because it is philosophically remarkable — and not in a flattering way. It fuses two entirely distinct instruments of policy: the external restriction of exchange, which is the tariff, and the internal price of credit, which is the interest rate. The confusion of these two things is not a small error. It is the kind of error that causes a great deal of suffering for ordinary people while enriching no one in particular.

Let me begin with trade restriction, the matter I know best. In The Wealth of Nations I argued at considerable length that mercantile restrictions — duties, prohibitions, preferential arrangements — are, in their essence, a tax levied on the general consumer for the private benefit of a narrow producer interest. When a government restricts the importation of foreign goods, it does not increase the real wealth of the nation; it merely redirects purchasing power from the many who buy to the few who sell domestically. The consumer pays a higher price; the protected merchant pockets the difference. The nation is, on net, poorer. This calculus does not change when the restriction is threatened rather than enacted, because the mere credible threat deranges the plans of merchants on both sides of the exchange.

Now layer onto this the demand that a central bank — an institution whose function, as I understand it from inference rather than direct knowledge, is to manage the supply of credit and the stability of the currency — submit to political direction on the timing of its decisions. I did not live to see modern central banking in its present form, and I will not pretend expertise in its engineering. But I will say this: the institutional independence of bodies charged with maintaining monetary order is exactly the kind of framework that markets require if they are to function honestly. When the sovereign announces that he will punish the trading public unless the monetary authority does his bidding, he is not exercising legitimate executive power over commerce; he is holding the consumer hostage in a quarrel with an institution he does not fully control.

The deeper error here is one I identified in my discussion of the mercantile system. The merchants and manufacturers who petition sovereigns for protection always dress their interest in the language of national strength. They speak of trade deficits as wounds, of imports as invasions, of foreign goods as enemies. I wrote that we should be suspicious whenever the authors of a commercial proposal are the very parties who stand to gain from its adoption. The same skepticism applies when a political authority frames the restriction of trade not as a favor to a domestic producer but as leverage over an independent institution. The question to ask is always: who bears the cost? The answer, as it almost always is, is the consumer — the anonymous multitude who simply wished to buy and sell freely.

What framework, then, would make this exchange honest? Three things, on my account. First, trade policy ought to be governed by rules known in advance to all parties, not by the sovereign's mood or negotiating posture on any given morning. The uncertainty alone is a tax on investment. Second, institutions charged with maintaining monetary and legal order must be insulated from the kind of pressure described in this report — not because their governors are infallible, but because markets cannot price anything reliably when the rules of the monetary game are subject to executive override. Third, and most fundamentally, we should recover the plain truth that the purpose of commerce is the welfare of the consumer. Production, employment, and the balance of trade are means to that end. When we treat the means as the end, we produce exactly the kind of policy now before us: restrictions that impoverish the public in order to demonstrate executive resolve.