the causes of the Great Depression are debated, at
the top of the list is the Smoot-Hawley Tariff Act
of 1930. [Half of my sources listed it as "Hawley-Smoot,"
but we'll go with the former.] In light of President
Bush's recent misguided steel tariff policy, a discussion
of Smoot-Hawley (hereinafter, S-H) may provide us
with a lesson or two, though as a free-trader myself,
I have to admit my own mind was made up long ago.
looking at the reasons behind the adoption of S-H,
it's important to remember that the history of commerce
in America was always one of high tariffs. It's a
gross generalization, but as a young nation the interests
of the business community seemed to be best served
by protecting our burgeoning industries, like in agriculture
and textiles, to name two, and our politicians were
only too happy to comply by passing all manner of
legislation towards that end.
World War I, however, U.S. business was particularly
fearful that America would be flooded with the products
of cheap European labor. Parts of Europe had been
destroyed, nations had huge debts, and unemployment
was rampant, thus, it's easy to see how costs could
be lower than in the United States.
cry for protectionism was far and wide, but President
Woodrow Wilson vetoed strict tariff legislation in
March 1921, weeks before he relinquished the presidency
to Warren G. Harding, saying in part:
ever there was a time when Americans had anything
to fear from foreign competition, that time has passed.
If we wish to have Europe settle her debts, governmental
or commercial, we must be prepared to buy from her."
Harding came in and enacted the Emergency Tariff Act
of May 1921, which supported agricultural interests
in particular, while that was followed by the Fordney-McCumber
Tariff Act of 1922. Signed into law on September 19,
1922, this latter legislation established the highest
rates in history, with tariffs on some products of
up to 400%. One Republican senator labeled Fordney
"protection run perfectly mad."
precipitated a huge trade war, yet prosperity in America
continued throughout the decade of the 1920s. As we've
discussed in some other "Wall Street History" articles,
though, by the end of this period, much of the prosperity
resulted from growth on Wall Street and industrial
America, while the farmers were suffering due to a
worldwide glut of product.
when it came time for the presidential election of
1928, Republicans looked at the overall economic climate
across the country and reached the conclusion that
high tariffs worked, so it was a major proponent of
the party platform. Many Democrats supported tariffs
as well, as the shape of commerce in the South changed
to one less reliant on agriculture.
after President Herbert Hoover took office in March
1929, Congress immediately set to work on a new tariff
regime. This is an important point, because you have
to picture that this legislation was winding it's
way through committee long before eventual passage
in June 1930. In other words, it is a fair statement
to say that the prospects for Smoot-Hawley had something
to do with the October 1929 market crash itself.
this is highly debatable, but as Robert Shiller points
out, on Monday, October 28, the New York Times ran
a front-page story on possible passage of Smoot-Hawley,
while on Tuesday the 29th, the day of the Crash, other
national papers had picked up on the issue. Shiller
acknowledges, however, that the Times ran various
stories on Smoot-Hawley, both pro and con, and it
would be ludicrous to pin the blame on it for the
market turmoil that fall. Regardless, the point is
that S-H was in the news for a long time.
for Hoover, he was determined to raise tariffs and
by June 1930, when a delegation of bishops and bankers
paid him a visit to ask for more public works projects
amidst a tumbling economy, the President told them,
"Gentlemen, you have come sixty days too late. The
Depression is over." On June 16, he then issued a
statement through the newspapers that he would be
signing a bill, in an attempt to aid those businesses
damaged by the downturn.
David M. Kennedy's "Freedom From Fear."
went along with his party's plan for tariff revision
because he wanted two things: higher duties on certain
agricultural imports, as part of his program to aid
farmers, and a strengthened Tariff Commission, with
power to adjust import duties by 50 percent. This
'flexible tariff,' said Hoover, would 'get the tariff
out of Congressional logrolling' and thus be a large
step toward reducing 'excessive and privileged protection.'
As for tariffs on manufactured goods, they should
be revised upward only where 'there has been a substantial
slackening of activity in an industry during the past
few years, and a consequent decrease of employment
due to insurmountable competition.'"
Democratic Senator Robinson had the following comment
on President Hoover's signal of approval.
express the hope, but not with great confidence, that
the Executive's dream of a scientific tariff, uninfluenced
by political considerations, may be realized through
the efforts of the Tariff Commission as approved by
the Executive. The promise by the President that complaints
from foreign countries that duties have been fixed
unduly high will be remedied by the Tariff Commission
is likely to unsettle conditions and disturb the peace
of mind of those who believe they have won a victory
in the passage of the bill.
complaints from foreign countries involve many rates,
and if the commission is to open the whole question
of the tariff upon applications inspired by foreign
governments or peoples, it is difficult to see how
the anxiety and uncertainty which has embarrassed
business during the last fifteen months can be escaped
or terminated." [Source: Richard Oulahan / NY Times.6/16/30]
above should be familiar to those following today's
debate on steel tariffs, as complaints from various
foreign governments have forced President Bush to
back off; infuriating even more interests in the U.S.
journalist Walter Lippman weighed in on Smoot- Hawley.
President has) surrendered everything for nothing.
He gave up the leadership of his party. He let his
personal authority be flouted. He accepted a wretched
and mischievous product of stupidity and greed."
who had supported Hoover in the 1928 election, now
said, "He has the peculiarly modern, in fact, the
contemporary American, faith in the power of the human
mind and will, acting through organization, to accomplish
results," but "the unreasonableness of mankind is
not accounted for in Mr. Hoover's philosophy.In the
realm of reason he is an unusually bold man; in the
realm of unreason he is, for a statesman, an exceptionally
thin-skinned and easily bewildered man." [Source:
Kennedy, "Freedom From Fear"]
how did the stock market respond initially to passage
of the tariff act?
June 14.Dow Jones 244
Mon., June 16.Dow 230
Tues., June 17.Dow 228
Wed., June 18.Dow 218
Thurs., June 19.Dow 228.yes, no change.
June 24, the market did fall to 211, but by July 18
the Dow was back to 240, so the immediate impact was
negligible. Of course we were still on our way to
a Dow Jones of a mere 41 by July 1932.]
business reality of Smoot-Hawley was far worse. 1,028
economists had earlier petitioned President Hoover
to veto the bill, but with enactment, tariffs hit
all-time levels on some 70 agricultural products and
900 manufactured items. The economists had warned
that S-H would raise prices to consumers, damage export
trade, hurt farmers, promote inefficiency and promote
foreign reprisals. As to the issue of increased prices,
you saw in a piece I did two weeks ago that consumer
prices actually collapsed in the years 1930-32, a
point that we will come back to.
for foreign reprisals, nations were outraged. Historian
Richard Hofstadter called the tariff act, "a virtual
declaration of economic war on the rest of the world."
Within two years, 25 countries had retaliated and
U.S. foreign trade took a huge hit. America had exported
$5.24 billion in goods in 1929 and by 1932, the total
was just $1.6 billion.
while it is plain to see how Smoot-Hawley contributed
to the spread of the Depression to Europe, some argue
that the Act itself really had little to do with the
continent's problems, compared to the issues created
by the post-World War I Treaty of Versailles. Certainly,
had he lived, Woodrow Wilson may have agreed with
this line of thinking.
the May 1931 collapse of Austria's leading bank, Creditanstalt
(WSH Feb. '02), was a death knell for the entire European
financial system, the cause of which had far more
to do with the rise of the Nazis in parliamentary
elections in September 1930 and massive speculation,
not Smoot-Hawley. And, as I alluded to above, while
tariffs often lead to higher prices, the issue worldwide
between 1930 and 1932 was deflation, not inflation.
both "Wall Street History" and my "Week in Review"
column, from time to time I use the phrase that "bad
government can cause depressions." I'm referring to
Smoot-Hawley, primarily, but while this particular
act was undoubtedly a major contributor to the economic
upheavals of the 1930s, to place all blame solely
on its passage wouldn't be accurate. Nonetheless,
it did play a major role in the Depression and should
act as a lesson to those who argue for indiscriminate
tariffs of any kind, without examining that which
history teaches us.
New York Times Century of Business," Floyd Norris
and Christine Bockelmann
"America," George Brown Tindall and David E. Shi
"A History of the American People," Paul Johnson
"Freedom From Fear," David M. Kennedy
"American Heritage: The Presidents," ed. Michael Beschloss
"The Presidents," ed. Henry F. Graff
"The American Century," ed. Harold Evans
"The Growth of the American Republic," Commager, Morison,
"The Great Game," John Steele Gordon
"Irrational Exuberance," Robert Shiller