Posted on 02/04/2009 2:40:10 PM PST by UCFRoadWarrior
"The Smoot-Hawley Tariff Act caused the Great Depression" as a number of talk-radio show hosts, politicians, and cable news channel reporters have lamented in recent weeks.
"The 'Buy American' clause in the Stimulus Bill will be another Smoot-Hawley" rails others.
Did Smoot-Hawley cause the Great Depression? The answer to that is "no".
Did Smoot-Hawley continue the Great Depression. The answer to that is "no", also.
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When it was announced last week that the proposed "Stimulus Bill" would contain a "Buy American" clause, every advocate of Free Trade...from conservative GOP members to Socialist European Union politicians...decried the "Buy American" clause, claiming it would affect Free Trade, lead to a "trade war", and, also lead to another depression "like Smoot-Hawley did in the 1930's"
However, there is no evidence the Smoot-Hawley Tariff Act caused the Great Depression, nor, did it exacerbate the Great Depression.
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The Smoot-Hawley Tariff Act, passed in the summer of 1930 in the wake of the Great Depression, was an attempt to try to preserve American industry from further economic erosion during the worst economic crisis in United States' history. The tariff was designed to protect American industry from potential predatory trade practices from foreign nations, mainly European (which was still reeling economically from the aftermath of World War I).
In recent years, the Smoot-Hawley Tariff Act has been the de facto "Economic Bogeyman" for the Free Trade and Globalist crowd. In the wake of the worldwide economic failure, the Free Trade advocates are looking for cover in the wake of huge national trade deficits, growing wordlwide unemployment, and a collapsing world banking system.
Smoot-Hawley has been their proverbial whipping boy.
However, the economics do not back up the negative assertions from its critics.
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In the following chart, you will see that the Smoot-Hawley Tariff Act had no real negative effect on the economy. In fact, in most years that Smoot-Hawley was in effect (1930-1945), the US national Gross Domestic Product actually GREW.
(Note that 1929 figures are included, as this was the year of the Stock Market Crash)
Table format
I Gross domestic product
II Personal consumption expenditures
III Gross private domestic investment
IV Exports
V Imports
VI Government consumption expenditures and gross investment
(Figures in billions of dollars)
I II III IV V VI 1929 103.6 77.4 16.5 5.9 5.6 9.4 1930 91.2 70.1 10.8 4.4 4.1 10.0 1931 76.5 60.7 5.9 2.9 2.9 9.9 1932 58.7 48.7 1.3 2.0 1.9 8.7 1933 56.4 45.9 1.7 2.0 1.9 8.7 1934 66.0 51.5 3.7 2.6 2.2 10.5 1935 73.3 55.9 6.7 2.8 3.0 10.9 1936 83.8 62.2 8.6 3.0 3.2 13.1 1937 91.9 66.8 12.2 4.0 4.0 12.8 1938 86.1 64.3 7.1 3.8 2.8 13.8 1939 92.2 67.2 9.3 4.0 3.1 14.8 1940 101.4 71.3 13.6 4.9 3.4 15.0 1941 126.7 81.1 18.1 5.5 4.4 26.5 1942 161.9 89.0 10.4 4.4 4.6 62.7 1943 198.6 99.9 6.1 4.0 6.3 94.8 1944 219.8 108.7 7.8 4.9 6.9 105.3 1945 223.1 120.0 10.8 6.8 7.5 93.0
NOTES:
Although trade declined after the Smoot-Hawley passage...and the GDP dropped each year between 1929 through 1933...the biggest percentage declined was in Gross Private Domestic Investment...it was not in trade. Private investment started to disappear in the US before Smoot-Hawley passage.
Also, trade was a small part of the US GDP before Smoot-Hawley. In 1929, the combined exports-imports were just over 10% of the GDP (well below today's current percentage of trade compared to GDP). Even if trade went to zero in the early Great Depression years, that would not explain the larger percentage drop in GDP (which was due mainly due to bad financial and business practices...pre-1929).
However, in years 1933-1937, the US GDP began to rise...and in much greater percentage than the total trade output. If Smoot-Hawley truly continued the Great Depression...why did GDP rise while trade not so much? If Smoot-Hawley truly continued the Great Depression...there would not have been the GDP growth.
1938 is an interesting year, because the GDP actually dropped from 1937 levels. Trade numbers also dropped....even though the overall tariff from Smoot-Hawley DROPPED from over 19% to over 15%. The reduction in tariff did not help the economy that year.
In 1939 and 1940, the GDP grew, while the trade totals still remained lower than before Smoot-Hawley. The percentage of trade-to-GDP continued to be smaller than in 1929
1941 saw the GDP finally eclipse the pre-1930 levels...while overall trade was much lower than pre-1930...Smoot-Hawley was still in effect at the time.
1942-1945 saw massive growth in the GDP, as the US was spending heavily on the World War II war effort. The percentage of trade-to-GDP continued to drop, with Smith-Hawley still in effect. It should be noted that, with World War II taking place, trade worldwide was affected.
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While Smoot-Hawley did not help the economy prosper, it certainly did not cause, nor continue, the Great Depression, as critics claim. In most years the GDP still rose, with trade restrictions in effect.
In the first year after the rate of tariff on Smoot-Hawley decreased (1938, after it was decreased in 1937)...the level of trade and the GDP dropped. The drop in trade and GDP in 1938 demonstrates even strongly that lower tariffs did not lead to economic gain.
Critics of protectionism and favorable national trade practices will need to find a new "Economic Bogeyman". The evidence does not support that Smoot-Hawley caused the Great Depression, nor continue it.
Unfortunately, as current Free Trade and Globalist practices continue to lead to worldwide economic failure, those ignorant of the real history of the Smoot-Hawley Tariff Act will continue to critique, without presenting the facts.
The facts do not support their thesis...and the constant misinterpretation of facts regarding Smoot-Hawley well demonstrate the inability of those Free Traders and Globalists who cannot provide any explanation to why current international Free Trade practices have not worked.
Bzactly.
We thank you for your support.
What impact did the Fed's 30% reduction in the money supply have on trade?
I wish Keynsianism were dead. One look at the new administration and we see this isn’t so.
It’s always fun to debunk the debunkers.
While I may lack a PhD or even an over the counter EDd, a review of history tells us: The leading cause of death amongst the Chinese and their Korean Allies was not ( small and I hereby tender an apology in advance to said veterans of that war) UN bullets and bombs - but simple hunger and exposure to the elements. I'm told Korean is Hell with ice by those who served there.
Of course now and thanks to Free Trade China has plenty of supplies for their troops. Why do you think Wal-Mart is revered there?
I do...But he was a lot funnier that you... :)
Tariffs are not taxes even though they increase the price consumers pay with all proceeds going to the fedgov? Uh, sure.
It's good to know the fedgov only uses tariffs (taxes) to protect the vital interests of American citizens and not to provide themselves with more money to spend on useless projects and graft that will guarantee they maintain their power and position. Tariffs (or quotas for that matter) are only used to protect industries that deserve protection and are never used to protect those who are politically connected (unions, big contributors etc)? When it comes to the issue of trade protection, the government all of a sudden transforms itself into an organization that can be trusted as being responsible, capable and reliable? If that's what you believe, why not just allow the fedgov to take over all production and distribution and protect everyone from everything? Oh yeah, that's what Barry wants to do and he's a Marxist.
Causality has been lost in the uneconomic non-thinking smattering of cr*p throughout this thread. I have been using some of the strategies of the original poster (throwing cr*p on the walls) to see if they’ll let it stick.
You’re the first person to correctly challenge my lack of intellectual purity; Trade, tarrifs, GDP, Money Supply, Interest Rates, Unemployment, etc. all have extremely complex interactions. Causation is quite difficult to prove without literally a PhD thesis on each very small topic.
In general terms from the general theories of economics (I’m a Monetarist), the reduction in Money Supply reduced economic activity of all types, including I suppose Trade. Milton Friedman argued that the restriction of money supply by the Fed was the key cause of the continuation of the Depression. I tend to agree. By the time the government piled onto that bad decision with tariffs and other anti-economic controls, you had a serious cluster f***.
We are on the same road now. Excepting the monetary tightening v. loosening difference, the “Buy American”, “Control Pay”, “Spend Like a Drunken Keynesian” and other policies are lined up for a repeat.
That main difference of loosening v. tightening brings with it its own problem: incipient inflation. The moment that Velocity, Price or Quantity increases, the Feds correct reaction should be to increase interest rates. They won’t. Politically, they can’t. And, there is the time delay between the first hint of inflation, and several quarters of proof of inflation. By the time you have proof, it is too late. Inflationary expectations are built in.
So, hang tight. With our brother Freepers arguing for less freedom and more taxes, just imagine what the other side can do to us.
"You can lead a man to Congress, but you can't make him think."
- Not Me
Go figure.
If you can.
5) the Fed was not blameless after 1933 either. It increased bank-reserve requirements in three steps in 1936 and 1937, leading to another significant decrease in the money supply. The result was the 1937–38 recession within the Depression, adding insult to injury.
After shrinking the money supply by 30% over four years until 1933, Fed actions further reduced it. I bet a graph showing GDP plotted against the money supply from 1929 through about 1950 would explain more than all the other talk of the GD that takes place.
Is it or is it not the duty of the federal gov’t to regulate trade with foreign nations? Answer: It is.
Is it or is it not the history of our nation that we have always had and used tariffs? Answer: it is.
Is it or is it not in our nation’s strategic interest to be able to produce our own steel, titanium, food, gold, microchips, nuclear warheads, and submarines? Answer: it is.
Did you know most all countries put taxes on our exports while we do not tax their imports. They have something called a VAT, which they rebate to their exporters but charge our products upon entry. Did you know the globalists in the WTO that manage, yes I said MANAGE, world trade do not have the US interest at heart.
Mirror trade is the answer, not any more ankle grabbing by the USA.
Trivia point. Smoot was the first Mormon Senator. He's from from Utah and Congress took 4 years of hearings to seat him (He was Republian of course)
http://en.wikipedia.org/wiki/Reed_Smoot_(U._S._Senator)
I don't know much about Hawley. Wiki says he was an economist. Hoover signed the bill. He became Pres. in March, 1929 and the crash was in Oct. Though there was a downward trend before that. Coolidge was the Pres. in 1929 so a full debate would need to include his approach to the economy and what effect that did or did not have on the actual crash. Coolige and Hoover had different economic approaches to the issue. (Sort of like a real deabte about 9/11 could not just focus on the few months Bush was in office and some of the things he did post 9/11.)
I'll openly admit i don;t really understand the entire issue. My non economist take on the issue after reading through this informative thread is that it may or may not have had a huge impact on the depression. IOW, I don;t know. My take is that a Depression has a lot more to do with than just one thing or even one President.
Not in a short article, no. But if you'd bother to read any of his books, which I have, you'd find all the proof you could want.
Actually, I've read enough of Sowell to take him at his word these days, if the subject is economics.
My complaint is that far too much importance is attached to free trade and free market theory and not on real world market realities. We don't really have free trade or free markets on an international basis. And the more the US opens its markets and pretends free trade really does exist when it usually doesn't, the more harm is done to the US economy.
That's also why the worlds "Smoot-Hawley" get on my nerves because that was minor element in extending he GD, but some act like it was the major element, and some act like it was the cause, and some act like it proves a lot more about tariffs that I believe it does.
A simple sentence that came down from some ancestors explained more about the GD than most of what was taught in schools until recently: "Nobody had any money." And that was the cause of the GD. It just took decades before economists uncovered the reasons why nobody had any money.
Go buy a padlock at home depot. Or a microwave oven at Target. Or a power tool at Lowes. Or a bicycle for your kid at Sears. Or a computer at Best Buy. Or a telephone at Office Depot. Or a set of light fixtures for your patio from Ace. Or a cell phone, a set of dishes, a doll for your kid, a wristwatch, a calculator, a steak knife, a paper gift bag, a pair of shoes, some blue jeans, a radio, etc etc, then get back to me how successful the long term stategy has been.
And that fact has never stopped them from doing stupid things has it?
Is it or is it not the history of our nation that we have always had and used tariffs?
The desire for trade protection gave us the 16th amendment. Don't you think Americans are taxed enough? And yes, tariffs are taxes.
Is it or is it not in our nation’s strategic interest to be able to produce our own steel, titanium, food, gold, microchips, nuclear warheads, and submarines?
And only tariffs can make that happen? Please. We've had a free trade policy since the end of WWII. In that time we've become the world's only superpower and the serve as the locomotive for the world economy. How much worse can it get?
Did you know most all countries put taxes on our exports while we do not tax their imports
Because they punish their consumers, we should do the same? Higher prices. For the children?
Did you know the globalists in the WTO that manage, yes I said MANAGE, world trade do not have the US interest at heart.
Because the WTO never rules in our favor? Is that what you think?
Mirror trade is the answer, not any more ankle grabbing by the USA.
Mirror trade? Managed by some bureaucrats in lifetime government jobs instead of free men freely deciding what's in their best interest? You do realize that people trade to benefit themselves otherwise they wouldn't make the deal, right?
Why you want higher prices and a more intrusive and powerful government is a mystery.
No you don’t...it is illegal to buy from Iran as well as other countries...when was the last time you had a legal Cuban cigar. There are more important things then your ability to by cheap crap...like this nation.
Allow me an opportunity for a thesis of about this economic hell that has nothing to do with trade whatsoever.
1) The Fed (Greenspan) loosened money supply tremendously after 9/11/2001. That was a good idea, since the "grease" of money was needed to keep the financial machinery moving in the money center of New York, a target of the attacks.
2) The Fed continued to dump money into the system well into 2003 (and up to 2005 IIRD), long after it was needed. The WSJ screamed from the rooftops about excess money supply.
3) Real Interest Rates (Cost of Money Interest less Inflation) were negative for several years. This was the Fed's way of BEGGING people to take the money: "It's better than free, we're paying you to take our money!". Many did.
4) That excess money had to go somewhere. Housing looked like a good bet. Many people put their excess money into housing.
5) Congress, in the person of Bawney Fwank, whose gay lover was a key Director at the appropriately named Fannnie, wanted looser morals / restriction around Fannie. He (and most other Congresscritters and Bush too) wanted everyone to own a home. Even people who couldn't afford them. So they passed laws making sure Fannie could blow it out the back door.
6) Wall Street invented some really nifty financial vehicles that nobody really understood, but they allowed tremendous amounts of money to be bet on the future direction of housing prices. These financial vehicles appeared to be low risk; they had Fannies name associated with them. Everyone got rich hawking these things (CDOs, etc.)
7) Lots of people thought they could get rich quick by investing in alternative asset classes, including Hedge Funds. Hedgies agreed to take their money, and put the proceeds into those nifty new Financial Vehicles like CDOs, which had always gone up and not down. Everyone's a winner!
8) ACORN assisted by one Barack Obama sued banks over "red lining," which was defined as the effect of maintaining good lending practices. When you have conservative lending practices, you tend to lend to good earners who can pay you back. They tend to be in the suburbs. Those non-earners in the city tend not to get loans. This looks like racism, since the relative non-earners are people of color in the city. ACORN won a bunch of lawsuits by screaming "racism," and banks quickly learned to loan anyone money, whether they could repay or not. The just quickly packaged up those loans and sold them to the Wall Street Hedgies so they wouldn't be holding the bag when the sh*t hit the fan.
Eventually, housing prices stopped going up (the music stopped), and everyone looked for the economic exits ("where's my chair?") There were no chairs. Everyone was expecting the other guy to be holding the actual value, yet nobody had actual value. All that paper was predicated on a bunch of people who couldn't really pay their mortgages because they were too poor to start with, or had placed their own bets (with big houses they couldn't afford) that housing prices would rise forever.
Voila! Housing crisis.
Please note that while the government's hands are all over this one, TRADE IS NOT.
I would do exactly as you suggest, but my husband is losing his job...he works at GM-the latest casualty of Free Trade...anything but Fair Trade so I can not afford to buy the cheap crap made in China by the COMMUNISTS so I agree the strategy is not working very well for Americans.
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