Debunking The "Smoot-Hawley Caused The Great Depression" Myth

Vanity | February 4, 2009 | UCFRoadWarrior

[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.

[PeteePie]

"It did not work, and America sank deeper into the Great Depression" love that movie!!!

[bill1952]

Sorry, but this analysis is fatally flawed.
Smoot Hawley was not an asset to this country.

Nor are those things that are happening today by way of Government intervention

[cripplecreek]

Unfortunately Reagan would be shunned as a protectionist by the very people who invoke his name in support of free trade.

Michael Reagan on his father.


Take the case of Harley-Davidson. My father protected this American manufacturer of motorcycles against lower-priced Japanese imports. When he acted in behalf of an American company, Kawasaki and Honda reacted by moving their plants to the U.S. and created American jobs for American workers.

His policy was so successful that although he gave five years of protective tariffs to Harley-Davison, they didn’t even need that long a time before they could turn their company around. Given a level playing field they proved their superiority as an American manufacturer.

Ronald Reagan did the same thing with semiconductors, and the auto and steel industries. He also forced the Japanese and others to open up their markets to American products so that trade would be fair. When that didn’t happen he would impose tariffs on those products coming into the U.S., thus protecting American manufacturers.

Sure, he was a free trader who wanted too open up trade, but he always sought first to protect the sovereignty of the United States and its manufacturing base. He did not confuse free trade with giving the store away.

The effects of our current trade policies and the horrendous trade deficit they have produced are a gun pointed at the heart of our economy, and the Republican who can stand up and tell the truth about this problem and its solutions will be the one who emerges from the pack.

Michael Reagan on Ronald Reagan, free trade, and Duncan Hunter

[UCFRoadWarrior]

There really wasn’t the increase in war production until 1942...the US did not enter the war until late 1941 after Pearl Harbor...and heavy production kicked in around 1943.

I did originally consider omitting the war years....but then I thought I would get much more criticsm for not including them. I did note that wartime affected trade

[Krodg]

Hopefully this will make i easier to read

I think you are easy to read.

[UCFRoadWarrior]

Umm...the GDP grew while trade did not....the economy was growing while trade did not....contrary to Smoot critics

[Uncle Miltie]

From: http://thefilter.blogs.com/thefilter/2008/01/the-not-so-secr.html

"The Smoot-Hawley tariffs came in June 1930. There is wide academic consensus that these prolonged the Great Depression, they certainly reduced global trade"

"Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.[12]" http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act

[Uncle Miltie]

Limiting growth is the argument against Smoot Hawley, not the elimination of growth. There isn’t a scientific test where we ran Smoot for some states and not for others.

Jeepers, folks. On the face of it, you cannot restrict economic freedom and INCREASE the value of stuff (goods, services, productivity, you name it). Economic restrictions only DECREASE the value of stuff.

[Uncle Miltie]

Thanks for the support. Should’ve known to go to the master.

[UCFRoadWarrior]

The economy grew while trade didnt. Smoot did not continue the Great Depression as the economy grew (even before the war)

I believe you think trade is the only thing about economics. Are you aware how much of the percentage of the GDP is from trade, currently?

Yes, I need a new spell check

[RC one]

I think the last depression was brought about by a number of factors that occured well before Smoot-Hawley. The fact is, free trade and globlization have led to this economic hell we find ourselves in. I think you would be hard pressed to convince me that we should create a trillion dollars in US debt so we can create jobs in Europe and canada and mexico.

[Big_Monkey]

"The founders of this country made great sacrfices to get it."

One thing that almost all the Founding Father's had in common was that they were not protectionist. Jefferson lobbied his entire life for open, free trade policies. In fact, he championed trade policies not based on political decisions, but purely on the basis of economic freedom. Read some of his open letters to the King shortly before the signing of the DOI. He's quite clear where he comes down on free trade.

[Uncle Miltie]

Larry Arn: You don’t think the Smoot-Hawley tariff caused the Depression?

Milton Friedman: No. I think the Smoot-Hawley tariff was a bad law. I think it did harm. But the Smoot-Hawley tariff by itself would not have made one quarter of the labor force unemployed. However, reducing the quantity of money by one third did make a quarter of the labor force unemployed. When I graduated from undergraduate college in 1932, I was baffled by the fact that there were idle machines and idle men and you couldn’t get them together. Those men wanted to cooperate; they wanted to work; they wanted to produce what they wore; and they wanted to produce the food they ate. Yet something had gone wrong: The government was mismanaging the money supply.

[UCFRoadWarrior]

There have been quite a number of people (mainly talk radio) who claim that Smoot-Hawley caused the Great Depression

So yes that comment has been made

As to the Great Depression was extended by Smoot...the evidence suggests otherwise. The pct of GDP growth most years during the depression belie that

[Lou Budvis]

Smoot-Hawley, high taxes, rise in union membership, gov’t entering the market - all contributed into making what should have been a severe recession into the Great Depression.

[Uncle Miltie]

"I believe you think trade is the only thing about economics."

You form beliefs on the weakest of sample sizes.

Do you know for whom I am named?

[UCFRoadWarrior]

Note Sowell provided no proof of his claim....no proof whatsoever.

Because the facts belie everything he said. And, I think he is aware of that....the GDP figures totally refute his claim

[Petronski]

Nice table.

ROFLMAO

[Mad Dawgg]

Smoot-Hawley was akin to buying a bigger shovel to dig yourself out of a hole.

[itsahoot]

The evidence does not support those contentions

Beware, you have entered the Freedman reality distortion field, here.

The problem we have is the owners of business's both foreign and domestic have no conscience, they would sell the rope to hang us with, and if our own business' won't then someone else will. The other problem is a good portion of our industry is owned buy foreign investors.

Any country that cannot 100% manufacture its own defense materials is in deep dodo. We let China come here and establish a ship building company, they bid on our Aegis Class destroyers....wala they have them too.