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11/12/2010

Smoot-Hawley

When 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 today’s global trade atmosphere, however, with the likes of German Chancellor Angela Merkel warning of protectionism ahead of the G20 meeting in Seoul, I thought it was a good time to reprise a piece I first did over eight years ago. 

---

In looking at the reasons behind the adoption of Smoot-Hawley (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, and our politicians were only too happy to comply by passing all manner of legislation towards that end.

Following 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.

The 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:

“If 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.”

Alas, 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.”

Fordney-McCumber 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.

But 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.

So 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 its 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.

Granted, 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 S-H, 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.

As 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.

From David M. Kennedy’s “Freedom From Fear.”

“Hoover 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.’”

Arkansas Democratic Senator Robinson had the following comment on President Hoover’s signal of approval.

“I 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.

“The 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 / New York Times 6/16/30]

Influential journalist Walter Lippman weighed in on Smoot-Hawley.

“(The 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.”

Lippman, 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”]

And how did the stock market respond initially to passage of the tariff act?

Sat., June 14…Dow Jones 244 [market open on Saturdays in those days]
Mon., June 16…230
Tues., June 17…228
Wed., June 18…218
Thurs., June 19…228…yes, no change

By 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.

The 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 an earlier piece* I did that consumer prices actually collapsed in the years 1930-32, a point that we will come back to.

*I will dig this one up and possibly re-run it as well after perusing it.

As 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.

But 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.

Additionally, the May 1931 collapse of Austria’s leading bank, Creditanstalt 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 Smmot-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.

In 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.

Sources:

“The 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, Leuchtenburg
“The Great Game,” John Steele Gordon
“Irrational Exuberance,” Robert Shiller

Wall Street History will return in two weeks with probably a related topic.

Brian Trumbore
 



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Wall Street History

11/12/2010

Smoot-Hawley

When 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 today’s global trade atmosphere, however, with the likes of German Chancellor Angela Merkel warning of protectionism ahead of the G20 meeting in Seoul, I thought it was a good time to reprise a piece I first did over eight years ago. 

---

In looking at the reasons behind the adoption of Smoot-Hawley (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, and our politicians were only too happy to comply by passing all manner of legislation towards that end.

Following 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.

The 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:

“If 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.”

Alas, 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.”

Fordney-McCumber 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.

But 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.

So 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 its 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.

Granted, 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 S-H, 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.

As 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.

From David M. Kennedy’s “Freedom From Fear.”

“Hoover 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.’”

Arkansas Democratic Senator Robinson had the following comment on President Hoover’s signal of approval.

“I 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.

“The 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 / New York Times 6/16/30]

Influential journalist Walter Lippman weighed in on Smoot-Hawley.

“(The 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.”

Lippman, 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”]

And how did the stock market respond initially to passage of the tariff act?

Sat., June 14…Dow Jones 244 [market open on Saturdays in those days]
Mon., June 16…230
Tues., June 17…228
Wed., June 18…218
Thurs., June 19…228…yes, no change

By 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.

The 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 an earlier piece* I did that consumer prices actually collapsed in the years 1930-32, a point that we will come back to.

*I will dig this one up and possibly re-run it as well after perusing it.

As 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.

But 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.

Additionally, the May 1931 collapse of Austria’s leading bank, Creditanstalt 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 Smmot-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.

In 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.

Sources:

“The 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, Leuchtenburg
“The Great Game,” John Steele Gordon
“Irrational Exuberance,” Robert Shiller

Wall Street History will return in two weeks with probably a related topic.

Brian Trumbore