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.

[Uncle Miltie]

"Not a single critical poster of this thread has been able to offer evidence contrary to what was posted....none"

Closing your eyes, plugging your ears, singing "LA LA LA I CAN'T HEAR YOU" does not constitute no "evidence to the contrary."

[sanchmo]

The pct of GDP growth most years during the depression belie that

So are we saying that unless GDP drops forever in perpetually increasing rates of decline, it's not that bad? Is GDP contraction supposed to plummet forever, into negative territory, to the point where we're actively destroying wealth, to the point where the Rockefeller family is trading chickens for raw wheat?

[Choose Ye This Day]

Did Hawley-Smoot cause the Great Depression? No, it was well underway. Did it help continue the GD? Yes, unemployment continued to go up, trade went down. That’s not a positive.

From the Dep’t of State:

Scholars disagree over the extent of protection actually afforded by the Smoot-Hawley tariff; they also differ over the issue of whether the tariff provoked a wave of foreign retaliation that plunged the world deeper into the Great Depression. What is certain, however, is that Smoot-Hawley did nothing to foster cooperation among nations in either the economic or political realm during a perilous era in international relations. It quickly became a symbol of the “beggar-thy-neighbor” policies of the 1930s. Such policies, which were adopted by many countries during this time, contributed to a drastic contraction of 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.

[UCFRoadWarrior]

You post only loss of trade....but do not provide any evidence that the economy did not grow during Smoot/Great Depression.

Instead of ridiculing my posts...provide some real evidence to support your argument.

Maybe you cant.

I notice that Economic Anti-Americans cannot handle the facts when presented. I am sure you have a positive spin on the current failed Free Trade system

[pissant]

The US Steel manufacturers were hurt by Bush’s tarrifs? Nonsense. They were the ones pushing it.

Contrary to one-worlders wet dreams, the US must produce adequate amounts of steel, titanium, high tech components, food, nuclear reactors, and many other products in order to survive in a very hostile world.

[Mase]

Hey Warrior, why not link us to the site where you found the chart you're unable to post? I'd like to know what kind of resources you employ to support this nonsense.

Why is it you protectionists conveniently forget that the very protectionism you defend was in large part responsible for the federal income tax we suffer under today?

"From the same article: "In the election of 1888, Republicans called for tariffs to protect American manufacturing. Benjamin Harrison's defeat of Democrat free trader Grover Cleveland led to passage of the McKinley tariff in 1890. An interesting aspect of the 1890 debate over the tariff is that protectionists abandoned any pretense that high tariffs were needed to protect infant industries. Even mature industries, they argued, needed protection. They further argued that high tariffs were needed to reduce the Treasury's surplus. They understood that sufficiently high rates would so discourage imports that tariff revenues would fall.

Protectionist tariffs remained the bedrock of economic policy of the Republican Party for the next 20 years. Indeed, Republicans were so intent on passing the Payne-Aldrich tariff in 1909 that President William Howard Taft supported the 16th Amendment to the U.S. Constitution creating a federal income tax as the political price for Democratic support of the tariff. That has to have been one of the worst deals in history -- a lose-lose situation if ever there was one."

The Truth about Trade in History

[hedgetrimmer]

Nice! Thanks for posting.

If you have a “free trade” ping list, please put me on it.

[UCFRoadWarrior]

Still doesnt explain the growth in the economy during the period from 1934 and beyond...

[Choose Ye This Day]

What makes up GDP, may I ask?

[familyop]

It was called the Smoot-Hawley tariff, in that order. Sowell's switching it around would only tend to make student research a little more difficult. And like it or not, the recovery did start in 1934 (see GDP, economists of our more honest fathers, all).

Just be grateful that the government didn't keep the businesses after starting them (important difference between the USA and Soviets). That said, our current bailouts and "stimulus" plan are funneling money mostly to government offices and porcine enterprises that produce nothing useful in return--pathological social engineers and CFR constituents. ..."business as usual." And yes, presidents Reagan and even Bush imposed wrongful tariffs (e.g., against Canadian lumber for the sake of one monopolizing Canadian expatriate with his false environmentalist fronts shutting small western American competitors down).

[UCFRoadWarrior]

I do not have a Free Trade ping list yet....but should work on one...thanks

[Uncle Miltie]

"but do not provide any evidence that the economy did not grow during Smoot/Great Depression"

Also, the moon did not turn purple while Smoot was in effect. Coincidence. Like the economy being able to grow even under the constraints of trade.

What a waste of time. Good day, sir.

[hedgetrimmer]

I, as a citizen anarchist-capitalist, have the inalienable right to buy whatever I want, from whomever I want at whatever price I can negotiate.

Now citizens of this country know that we do not have the "right" to buy stolen goods from criminals, for starters.

Since we abolished slavery by constitutional amendment, we do not have the "right" to buy goods made by slaves for slave traders. In fact we have a moral imperative NOT to do so. As a free people, we have a moral imperative NOT to make communists wealthy so that they can spread communism around the globe. But look at what the "free traders" have wrought....

There are plenty of things that moral citizens ask their Congress to do, because only a moral people can preserve the Republic. That includes regulating international trade. It's in the Constitution!

[UCFRoadWarrior]

Tariffs are not taxes “plain and simple”. They are also an effective method for diplomacy, negotiating trade deals, and protecting industries that are vital to US survival. - pissant

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Excellent point....and today it still used by “trading partners” of the United States....also China uses a form of tariff by floating their currency....and the EU uses a form of tariff by VAT rebates....which is why the Euros screamed over “Buy American”

I do wonder whose side the Free Traders are really on..

[Uncle Miltie]

"The US Steel manufacturers were hurt by Bush’s tarrifs?"

I know you well from around these parts, so I will give you the opportunity to re-read my post, with additional emphasis:

"So when Bush “protected” the Steel Industry with tariffs and U.S. industries that consumed steel were greatly harmed, that was good for us."

[Will88]

The great depression and its offspring, the New Deal, could both have been avoided if the Federal Reserve had performed the task assigned to it. All the Federal Reserve had to do to avoid the Depression and the subversion of the American constitutional order was to purchase $1 billion in government securities during the 10-month period from December 1929 to October 1930. The result would have been an increase, instead of decrease, in high-powered money, and the banking crisis that began in the autumn of 1930 would not have occurred.

From a great Hoover Institution article on the Great Depression:

Link Description

I think it's now generally agreed, or almost generally agreed, that the Fed action was the cause of the GD. And I don't think Smoot-Hawley is even mentioned in the article, though the manifold government spending programs are discussed a great deal. And the Fed shrunk the money supply by 30%.

[org.whodat]

You are correct, but there are many reading disabled people.

[pissant]

The purpose was to protect the STEEL MANUFACTURERS from foreign dumping. Perhaps you need to understand what dumping strategies are, such as those employed by China.

It was not intended to benefit those who were buying the dumped foreign steel.

[Choose Ye This Day]

No answer as to what constitutes GDP? Okay, let's go to the internets, shall we?

Components of GDP

Each of the variables C (Consumption), I (Investment), G (Government spending) and X − M (Net Exports) (where GDP = C + I + G + (X − M) as above)

C (Consumption) is private consumption in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing.

I (Investment) is defined as investments by business or households in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. The distinction is (in theory) clear: if money is converted into goods or services, it is investment; but, if you buy a bond or a share of stock, this transfer payment is excluded from the GDP sum. That is because the stocks and bonds affect the financial capital which in turn affects the production and sales which in turn affects the investments. So stocks and bonds indirectly affect the GDP. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of real production or the GDP formula.

G (Government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.

X (Exports) is gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.

M (Imports) is gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Hmmm...Wasn't there a whole lot of *G* spending going on in the 1930s? Wouldn't that have something (a great deal) to do with GDP increasing? C, I, X and M were all going down, but G was going gangbusters.

[org.whodat]

I smell libertarian, what age should the law be for age of consent for young girls.