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08/30/2002

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 President Bush’s recent misguided steel tariff
policy, a discussion of Smoot-Hawley (hereinafter, S-H) may
provide us with a lesson or two, though as a free-trader myself, I
have to admit my own mind was made up long ago.

In looking at the reasons behind the adoption of 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, to name two, 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 it’s 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 Smoot-Hawley, 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 / NY
Times 6/16/30]

[The above should be familiar to those following today’s debate
on steel tariffs, as complaints from various foreign governments
have forced President Bush to back off; infuriating even more
interests in the U.S. than before.]

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 think-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
Mon., June 16 Dow 230
Tues., June 17 Dow 228
Wed., June 18 Dow 218
Thurs., June 19 Dow 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 a piece I did two weeks ago that
consumer prices actually collapsed in the years 1930-32, a point
that we will come back to.

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 (WSH Feb. ’02), 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 Smoot-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

Brian Trumbore



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-08/30/2002-      
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Wall Street History

08/30/2002

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 President Bush’s recent misguided steel tariff
policy, a discussion of Smoot-Hawley (hereinafter, S-H) may
provide us with a lesson or two, though as a free-trader myself, I
have to admit my own mind was made up long ago.

In looking at the reasons behind the adoption of 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, to name two, 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 it’s 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 Smoot-Hawley, 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 / NY
Times 6/16/30]

[The above should be familiar to those following today’s debate
on steel tariffs, as complaints from various foreign governments
have forced President Bush to back off; infuriating even more
interests in the U.S. than before.]

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 think-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
Mon., June 16 Dow 230
Tues., June 17 Dow 228
Wed., June 18 Dow 218
Thurs., June 19 Dow 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 a piece I did two weeks ago that
consumer prices actually collapsed in the years 1930-32, a point
that we will come back to.

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 (WSH Feb. ’02), 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 Smoot-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

Brian Trumbore