US Silver Purchase Experiment Proves Trade Interventions Can Backfire

The US government's silver purchase experiment during the Great Depression is a cautionary tale of how trade interventions can backfire. Between 1934 and 1941, the Treasury bought 2.55 billion ounces of silver to boost exports by manipulating exchange rates.

The goal was to raise silver prices sixfold from 24.5 cents an ounce to $1.29, but instead, the government's actions led to a series of unintended consequences.

People in countries using silver as currency responded by devaluing or demonetizing it, nullifying any benefit to US exporters. The Republic of China, for example, saw its exports become less competitive while its people melted their coins, leading to massive deflation and ultimately the communist victory in the Chinese Civil War.

The silver purchase experiment is a prime example of how knowledge problems, incentive problems, and the impossibility theorem cause trade intervention to backfire. Despite the government's best intentions, its actions were motivated by special interests and driven by unpalatable politics.