by Archie M. Richards, Jr., CFP^®
December 31, 2001

At the year's beginning, we look backward at two opposing trends to discern the stock market's future direction.

During the 19th century, tremendous technological improvements busted wide open the natural, geographic barriers to international trade. Railroads, steel-hulled ships with screw propellers, and many other developments enabled goods to be delivered far more quickly and cheaply. Also, government taxes on trade, called tariffs, were greatly reduced.

An explosion of international trade resulted. Asia , Africa , and Latin America exported raw materials and agricultural goods. Northern Europe exported manufactured goods. Those who pressed for lower tariffs believed, as I do, that free trade would eventually link the people of the world together in a matrix of trust, replacing the military struggles of the past.

(Unfortunately, the United States did not participate in the lowering of tariffs. The nation was large enough to supply its own raw goods. Its technologies were so advanced and its government policies, other than the high tariffs, were so favorable that its economy soared nonetheless.)

But not long after international trade was liberalized, opposing political forces began to take shape. Increases in the power of national governments and government economic planning came to the fore.

Low tariffs stood in the way of central planning. The planners wanted to impose minimum wages, for example. But they questioned doing so when workers could lose their jobs because of competition from cheaper foreign goods. On the basis of such reasoning, tariffs were lifted.

When a government raises the cost of imports, the prosperity of the exporting nations is reduced. Restricting trade sets nations one against another. Collectivism, economic centralization, and protectionism turned into aggressive nationalism, especially in Germany . The result was World War I.

The economic distortions of that war led to the Communist revolution in Russia and fascism in Germany , Italy , and Japan . A big boost in tariffs by the U.S. added to the stress. All of this brought on three horrors: the Great Depression, the psychotic barbarities of the fascists, and World War II.

After World War II , America , to its credit, pushed for lower tariffs. But although aggressive nationalism came to a halt (except in Russia and China ), the pressure to advance central economic planning continued nearly everywhere, including in America .

Finally, only about a quarter-century ago, the power of national governments began to weaken. Quite simply, central planning had proved a failure. The Soviet empire fell, China opened up to the outside world, and dictatorships in numerous developing countries dissolved.

With falling tariffs and greater individual liberty, international trade as a percentage of the world's economic output has only recently surpassed the levels it attained almost a century ago.

No political or social trend lasting as long as a century dies easily, including government economic planning. One residue of such planning is the U.S. Social Security system. For Americans to set aside about ten percent of their income each year and give sole control of all that money to only 535 people in Washington is ridiculous.

But just as the thrust toward central economic planning was long-lived, the retreat from it will be long-lived as well. Indeed, the trend toward liberalization has only just begun. The current international police work against terrorism is far less consequential than the last century's horrific struggles. Academics in American universities, whose leaders came of age during the student revolution of the late-1960s, continue to press for the advancement of collectivism. But they are increasingly marginalized.

Meanwhile, the Internet and other new forms of communication empower individuals, increasing liberty throughout the world. Eventually, America 's gargantuan governments will weaken. Even government ownership and control of American education will give way. With so many high school graduates unable to read, it, too, has failed.

The stock markets of the world have always responded to the lowering of tariffs and the advancement of liberty with rapid growth. I believe that liberalization will continue for a long time to come and that the rapid growth of stocks will follow suit.

Regarding a recent column of mine about withdrawals from Roth IRAs prior to age 59 ½, a reader points out my failure to mention that the IRS's 10-percent penalty applies only to withdrawals that exceed the contributions to the IRA.