More on Smoot-Hawley

by Don Boudreaux on June 17, 2007

in History, Trade

Seventy-seven years ago today President Herbert Hoover signed the Smoot-Hawley tariff bill; he and the Congress thereby raised tariff rates to unprecedented heights.  Here’s a summary:

But while the tariff might not have caused the
Depression, it certainly did not make it any better. It provoked a
storm of foreign retaliatory measures and came to stand as a symbol of
the "beggar-thy-neighbor" policies (policies designed to improve one’s
own lot at the expense of that of others) of the 1930s. Such policies
contributed to a drastic decline in international trade. For example,
U.S. imports from Europe declined from a 1929 high of $1,334 million to
just $390 million in 1932, while U.S. exports to Europe fell from
$2,341 million in 1929 to $784 million in 1932. Overall, world trade
declined by some 66% between 1929 and 1934. More generally,
Smoot-Hawley did nothing to foster trust and cooperation among nations
in either the political or economic realm during a perilous era in
international relations.

Protectionism doesn’t achieve even its own nonsense goal of increasing  exports.  A revealing, specific example involves eggs.  Smoot-Hawley raised the tariff on egg imports into the U.S. from eight cents to ten cents per dozen.  This higher tariff caused eggs imports from Canada to fall by 40 percent.  In response, Canadian authorities increased the tariff on U.S. eggs exported to Canada; this tariff went from three cents per dozen to ten cents per dozen.  The result was that American eggs exports to Canada fell by 98 percent – from 11 million annually just before Smoot-Hawley to a mere 200,000.   (I found this tidbit in Jeffry Friedan’s 2006 book Globalization.)

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{ 17 comments }

DS June 17, 2007 at 9:46 am

The Smoot-Hawley tariff, more than any other single mistake that governments around the world made in this time period, was a giant factor in turning the 1929-30 recession into "the Great Depression".

It very easy for people to look at the economic conditions at the beginning of that recession, a normal though regrettable economic correction, and try to blame the next 20 years of stagnation on those circumstances. But it was the mistakes and compounding of mistakes made by governments around the world that extended it way beyond any normal economic correction.

This is a distinction missed by most people: the economic events of 1929-30 were hardly unprecedented. A sharp and deep recession hit the world in 1920-21. The difference was the government's reaction to it; in the earlier event the government reaction was essentially to let it take it's course. Which it did very quickly, though not without economic pain.

There was no fundamental economic circumstance in 1929 that should have lead to a period of 20 years before the pre-recession economic levels returned. Turning a normal recession into a worldwide, 2 decades long catastrophe was accomplished by a global bought of misguided government policy.

Adam June 17, 2007 at 11:09 am

There's one thing I don't get about the popular understanding of the Great Depression. As I see it, most people (to the extent they know anything about this time period) have been taught that a free-market, unregulated economy spiraled out of control and it was only when FDR stepped in with the New Deal that things got better.

The first, less serious problem I have with this story is that people are taught that one of the main reasons for the Depression was too much credit and therefore an economy built like a house of cards. For some reason this is blamed on private enterprise when the government was entirely responsible for regulating the money supply. Whether that really WAS the cause is irrelevant, the point is that's what people believe. So people are taught that X was a major cause and therefore free markets are bad, when in reality government was entirely responsible for X.

The second, larger point I have is that everyone "knows" that the New Deal was the only thing that saved civilization; in other words, it's because of the New Deal that the Depression was not as bad as it could have been. But everyone also "knows" that THE DEPRESSION DIDN'T END UNTIL WORLD WAR II! So, really, WTF? How on Earth have generations of children (as far as I can tell) been taught that X happened, and it was really bad, it was only the government doing Y that saved us all… when the kids are simultaneously taught that, oh, by the way, X continued for a long time after Y was implemented and only went away when Z happened (which had nothing to do with the US government).

It just seems to me that crediting the New Deal for economic recovery of the '30s is like blaming Reagan for the Soviet-American nuclear exchange of '80s. You're trying to explain something that NEVER HAPPENED!

So how did we get to the point where everyone "knows" that FDR's welfare state is essential for the economy to run properly?

(bangs head against wall)

TGGP June 17, 2007 at 11:28 am

Wasn't the Great Depression one of the few times in American history in which we had a trade surplus? So in that sense, may Smoot worked, but in the sense of actually helping the economy it didn't.

TO June 17, 2007 at 11:36 am

The U.S. ran a trade surplus almost continuously from 1900 until the 1960s. The S-H tariff had nothing whatsoever to do with this.
For pre-depression figures see
http://www2.census.gov/prod2/statcomp/documents/1933-08.pdf

M. Hodak June 17, 2007 at 11:36 am

Funny how Smoot, Hawley, and Hoover were considered "pro-business" conservative Republicans. Their poor stewardship of our economy led to the election of pinkos that followed them. Our republic hardly had a chance after that.

The last 70 years has been a long, bloody, often interrupted slog back up the hill of economic sense and freedom. As bad as our modern, congressional ignorami may sound, they still may much more sense than their distant predecessors.

TO June 17, 2007 at 11:36 am

Here's the link–I guess you need to stitch it together

http://www2.census.gov/prod2/statcomp/
documents/1933-08.pdf

Sam Grove June 17, 2007 at 11:38 am

Government is collectivized human stupidity in action.

M. Hodak June 17, 2007 at 11:39 am

* make

Jody June 17, 2007 at 2:07 pm

Protectionism doesn't achieve even its own nonsense goal of increasing exports

I'm not a protectionist, but I thought the goal of protectionism was to protect domestic industries from foreign competition – something quite different from boosting exports.

jn June 17, 2007 at 5:12 pm

It quite certainly does have the goal of reducing imports to boost demand for domestic goods (both domestically and abroad). Unfortunately, a frequent result of tariffs are counter-tariffs. So, while the initial tariff will have no effect on exports, it is the reaction by our (former) trade partners that lowers the exports. Call it protectionist blowback, I suppose.

TO June 17, 2007 at 11:25 pm

"It quite certainly does have the goal of reducing imports to boost demand for domestic goods (both domestically and abroad)."

It might have that goal, but need not have that effect. The impact of a tariff on demand for imports depends upon the price elasticity of demand for these imports. For example, we can impose a tariff on oil and not expect to see oil imports fall much. Most estimates suggest that for the US, price elasticity of demand is not well-suited to bring about adjustment via protection (or currency devaluation).

"So, while the initial tariff will have no effect on exports, it is the reaction by our (former) trade partners that lowers the exports."

Actually, no. Foreign retaliation is unnecessary for poorer export performance with high tariffs. The "Lerner Symmetry Theorem" tells us that a tax on imports is also a tax on exports.

Mace June 18, 2007 at 11:32 am

For the benefit of US citizens, I hope the current congressional majority will read this article & comments.

Steve June 18, 2007 at 2:14 pm

Wait a second… Did I just read that we had a current account surplus in 1929 and 1932? How, then, could we have fallen into a depression? Trade deficits (with China in 2007) are bad, right? Surpluses should have kept our economy afloat, right?

Methinks June 18, 2007 at 3:15 pm

People who love tariffs – and government meddling in general – strike me as people who cannot think beyond stage one.

If you asked these same braniacs to write a diet book, the process would go something like this: food causes weight gain, food is the problem, eliminate food. Externalities? What externalities?

Actually, given an editorial in the WSJ this morning, that example isn't so far from reality.

Will June 18, 2007 at 3:57 pm

I think Adam is right that there was a trade surplus during the depression, because of such a monumental drop in consumer spending. As Steve Forbes likes to point out, America or American colonies have had a trade deficit for all but thirty something years of the past three hundred. Look at what terrible shape it's left us in.

Steve June 19, 2007 at 12:20 pm

Just to clarify, I was being sarcastic in my first post and posted my comment without reading the prior comments, so I hadn't seen that someone had already commented on the trade surplus.

I'd really like to see a politician who's a free trader bring up the Great Depression and it's fabulous trade surpluses the next time someone bemoans the current trade deficits.

Jonathan K July 15, 2008 at 2:44 am

An explanation of what caused the great depression requires only two words: Smoot Hawley.

The only issue is this: The stock market crash(B) was 8 months BEFORE Smoot-Hawley(A), so how could A have caused B if A came after B in sequence of time? The answer is simple. Security prices reflect EXPECTATIONS. The new, lower stock market prices beginning October 24, 1929 were reflecting the expectations that the Smoot-Hawley Tariff Act was going to be signed into law. And 8 months later, on June 17, 1930, it was.

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