11 MIN READ - In Chapters 1-3 of this Great Depression series, we’ve discussed the intensifying effects of higher taxation, swelling government spending, and federal price and wage floors on what began as the Recession of 1929 but tragically grew into the Great Depression. However no policy conversation is complete without discussing international trade and the notorious Smoot-Hawley Tariff. “Smoot-Hawley” has at times been blamed as the main driving force behind the Great Depression and in more recent times reassessed as a nearly insignificant factor. As we shall see later the truth lies somewhere in between with the tariff still playing a major role in worsening the slump.
I. THE TARIFF'S ORIGINS
A little known story about Smoot-Hawley is that the tariff legislation was already being deliberated and drafted throughout 1929 even before the October stock market crash.
American farmers had not participated in the prosperity of the “Roaring Twenties.” Global demand for U.S. crops peaked during World War I, spurring farmers to borrow and overexpand production only to be caught in a global postwar tapering of demand for U.S. agriculture that retreated to normal levels. The Republican Party, at the time longtime proponents of protectionism going back to the early 19th century Whigs and Alexander Hamilton’s Federalists, had already passed generally protective measures in the 1909 Payne-Aldrich Tariff which in turn was reduced by the Woodrow Wilson Democratic majority’s 1913 Underwood-Simmons Tariff Act.
With Warren Harding’s Republican victory in 1920 duties were reintroduced in the 1922 Fordney-McCumber Tariff, but as farmers continued to languish throughout the decade the GOP promised to deliver additional federal assistance during the 1928 election campaign. Upon Herbert Hoover’s 1929 inauguration Congress quickly began drafting the new legislation.
But proposing tariffs on imported food was an odd way to help farmers in 1929. The USA already imported very little food. For example, just 1/50th of one-percent of U.S. corn consumption came from imports in 1929. Although not every imported crop represented so small a share of the domestic market, the overall competitive impact of agricultural imports was still very small. Also the USA was running a considerable trade surplus at the time which made tariffs an ineffective way to help farmers who were reeling instead from high debt and low prices due to worldwide oversupply. And the unemployment rate was just 3%.
Once word spread that Congress was drafting a new tariff with Herbert Hoover’s blessing, manufacturers quickly descended on Washington to lay their own claims. The legislative conferences quickly descended into a morass of lobbying and special interests. The process slowed as every industry and its Congressional sponsor had their say. Senators and Congressmen engaged in extensive “logrolling” or trading of votes. That is, if a Senator from Virginia promised to support tariffs on imports that protected Colorado interests, Colorado’s Senator would promise to support tariffs on imports that protected Virginia’s interests (a true exchange between Senator Charles Waterman, R-CO and Carter Glass, D-VA).
Senate sponsor Reed Smoot (R-UT) was a seasoned and capable legislative administrator, himself having helped draft the 1909 and 1922 Republican tariffs, and upon completion of the combined House-Senate version he named the bill the “Smoot-Hawley Act,” departing from the tradition of placing the House sponsor’s name first (ie. “Hawley-Smoot” for Rep. Willis Hawley, R-OR).
By mid-1930, after a series of marathon deliberations poring tediously over countless imported items one-by-one, the bill’s combined version was finally passed and sent to President Hoover’s desk with strong Republican support and Democratic opposition. In the end Smoot-Hawley was touted as an aid effort for the ailing American farmer, but the majority of its duties were levied on imported manufactured goods and raw materials with only a small minority imposed on agricultural imports.
II. WARNINGS FOR HOOVER
Hoover’s announcement that he intended to sign a tariff bill was hardly without controversy. The October 1929 stock market crash had already put Americans on edge about an upcoming recession. Although the country was not to enter the most tragic phase of the Depression yet in mid-1930, banks were curtailing credit, industrial output was falling, and unemployment was already creeping up.
Meanwhile politically connected manufacturers were for the tariff, but other manufacturers who would pay higher prices for imported materials were mostly against it. A good example is the auto industry which would be forced to pay higher prices for countless chemicals, metals, oils, paints, and rubber. Executives also worried that possible foreign retaliation could hamper export sales of American cars. Henry Ford reportedly told Hoover in person that the tariff was “an economic stupidity.”
Banking and financial industry leaders warned Hoover that post-WWI America was now the world’s largest creditor nation and that if trading partner nations were unable to export goods to the U.S.A their inability to pay back American loans risked destabilizing the entire international financial system. Hoover advisor Thomas Lamont of J.P. Morgan recalls “I almost went down on my knees to beg Hoover to veto the asinine Smoot-Hawley Tariff.”
Even as the bill awaited Hoover’s signature, vocal opposition still emanated from Congress. Senator John Nance Garner (D-TX), FDR’s future Vice Presidential running mate, expressed his opposition arguing that the tariff…
“…violates every precept of common sense, justice and sound economics. Under the guise of protecting the products of agriculture, the Republican majority in both Houses has inflicted upon the country industrial rates that are indefensible; rates that can only serve to add to the burden the farmers and consumers have carried for years; rates that will tend to reduce, and in fact eliminate, the foreign markets for many of our products, both industrial and agricultural.”In support of the tariff, Rep. Frank Crowther (R-NY) countered predicting:
“Once this bill becomes law, business confidence will be immediately restored. We shall gradually work out of the temporary slump we have been in for the last few months, and once more prosperity will reign supreme. Foreign reprisals will vanish into thin air and we shall continue to raise the standard of American labor and American wages. We shall dissipate the dark clouds of your gloomy prophesy with the rising sunshine of continued prosperity.”Public opinion polls showed that large majorities of Americans were against the tariff. Having read for over a year stories of special interests lobbying intensely for protectionist favors and logrolling for votes between politicians, public sentiment had long turned negative towards the bill.
A majority of American newspapers spoke out against the tariff. In a survey of newspaper editors, a consistent majority of 70-75% responded that “The Smoot-Hawley bill is not in the best interests of the American people,” “Farmers in general will not benefit from the Smoot-Hawley bill,” “U.S. foreign trade will fall off if the tariff bill becomes law,” and “The long discussion of the bill in Congress has had an adverse effect on American business and prosperity.”
In May of 1930 a group of 1,028 economists from 179 colleges and universities sent a signed statement to the White House and Congress urging both branches to defeat the measure. The statement raised four general objections which were:
1) The tariff would raise the cost of living by “compelling the consumer to subsidize waste and inefficiency in [domestic] industry.”
2) The farm sector would not be helped since “cotton, pork, lard, and wheat are export crops and sold in the world market” and the price of farm equipment would rise.
3) “Our export trade in general would suffer. Countries cannot buy from us unless they are permitted to sell to us.”
4) The tariff would “inevitably provoke other countries to pay us back in kind against our goods.” Finally, Americans with investments abroad would suffer since the tariff would make it “more difficult for their foreign debtors to pay them interest due them.” (from Phalan, Yazigi, Rustici)
In summary the statement argued...
“Already our factories supply our people with over 96 percent of the manufactured goods which they consume, and our producers look to foreign markets to absorb the increasing output of their machines. Further barriers to trade will serve them not well, but ill.” And the economists predicted that higher tariffs would “inevitably inject… bitterness” into international relations and “plainly invite other nations to compete with us in raising further barriers to trade.”And America’s trading partners watched with nervousness. The country with the most to lose—America’s largest trading partner: Canada—was led by the Liberal Party government of Prime Minister Mackenzie King. King’s party had generally supported pro-free trade policies with the U.S.A and low tariffs. But even as early as November 1928, upon hearing of Herbert Hoover’s election victory, King wrote in his diary he feared that Hooverian trade policies might lead to “open border warfare.”
Nevertheless King still considered a further tariff reduction on U.S. goods in early 1930, but delayed the vote pending the outcome of Smoot-Hawley. King expressed his personal concerns about the tariff to Herbert Hoover, and in late 1929 he gave a widely publicized speech warning that if American raised tariffs on Canadian imports, Canada would be compelled to respond.
Despite all the public, political, and international opposition, Herbert Hoover signed the Smoot-Hawley Tariff into law on June 17, 1930, raising tariffs on dutiable imports and changing the status of hundreds of previous duty-free items to dutiable as well.
III. INTERNATIONAL REACTIONS
During the 19th and early 20th centuries the United States also routinely imposed tariffs on imports, but the world largely ignored them. That changed after World War I when America emerged as the world’s leading creditor. The U.S. was also technically the world’s largest economy beginning in the 1880’s, but it assumed a new economic leadership role after the Great War.
The Fordney-McCumber Tariff of 1922, being a post-WWI duty, could have been viewed as an anathema to the international community, but in 1922 the U.S. was rebounding sharply from the deflationary Depression of 1920-21 and American buying of imported goods was increasing, so the tariff was mostly dismissed. By contrast in 1930 both the U.S. and the world were falling into depression, and international reaction to Smoot-Hawley was decisively more negative.
In May of 1930 (before signing of Smoot-Hawley) the Mackenzie King government of Canada had called for a new election in July. With the signing of Smoot-Hawley, Parliament’s Conservative Party members began criticizing King for being too soft on American trade and called for Canada to respond. King, in an effort to placate the Tories and improve his image with Canadian voters, raised tariffs on sixteen imported goods—mostly agricultural—which represented approximately 30% of imports from the U.S.
However King still lost the election over the trade issue and the new Conservative government immediately launched emergency tariffs against a much wider array of U.S. products (both agricultural and manufacturing) representing 70% of U.S. imports. All throughout the Canadian political drama neither the Liberals nor the Conservatives publicly referred to their policies as “retaliation,” but that was in effect what Canada was doing.
The Conservatives had long advocated moving away strategically from the United States and closer to Britain so the tariffs on U.S. goods—as well as reduced tariffs on British imports—were perfectly aligned with their larger foreign policy objectives. The Smoot-Hawley Tariff is widely considered to be the deciding factor in the overthrow of the King government that enabled Canada to strategically shift its alliance across the Atlantic.
In Cuba the Smoot-Hawley duties on imported sugar led to more serious consequences. Cuba was heavily dependent on sugar exports to the U.S. Even though the amount of sugar exported was not significant compared to the enormous U.S. market, it was a major source of income and jobs for the Cuban economy. The resulting sharp dropoff in sugar sales to America and general depression led to the overthrow of Geraldo Machado’s pro-U.S. government in 1933. Although the revolution was short-lived, the messy outcome resulted in the quick overthrow of the Marxist Ramon Grau presidency by military strongman Fulgencio Batista. And Batista’s two tenures as Cuban President, particularly from 1952-1959, famously led to major foreign policy headaches for the United States later.
Europe was particularly incensed by the Smoot-Hawley Tariff. In European eyes, the United States was not only the world’s leading economy and leading creditor nation, but it was also running a large trade surplus. America had experienced a prosperous 1920’s decade while much of Europe had struggled with postwar economic reconstruction. Yet here the U.S. was putting up trade barriers to products that Europeans needed to export to pay back their World War I debts.
Since the larger European economies were engaged in Most Favored Nation (MFN) agreements with the U.S., they could not simply slap tariffs on American goods but not similar products from other countries. So they targeted products that were imported largely from the U.S., resorted to import quotas, or used other political excuses to target U.S. imports. For example, almost immediately Britain stopped the import of all American apples due to “sanitation” and “public health” reasons. Argentina, although a Latin American country, banned the import of U.S. eggs for the same reason.
France and Germany, trying to avoid direct diplomatic confrontation, announced few tariffs but in mid-1931 began quietly imposing import quotas on American goods. France also began moving away from the United States and brokering more favorable trade deals with the rest of Europe. Germany, which had already suffered from the effects of paying back WWI debts and reparations under the Versailles Treaty, moved towards economic autarky.
Great Britain responded in 1932 with the “Imperial Preference” system of duty-free trade between itself and its former colonies and Dominions. Canada quickly joined Imperial Preference as the British Empire and Commonwealth—representing close to a quarter of the world’s population and land mass—walled itself off economically from the international community.
To the extent that European nations raised tariffs on imports that were largely American in origin (due to MFN rules against targeting a specific country), there was still some collateral damage to similar imports from other countries even if their export levels were smaller than America’s. This built resentment between European neighbors which ultimately led to the raising of trade barriers even within the continent.
Other European nations, which were not part of MFN agreements, were more direct in their use of retaliation. Spain launched a tariff on American cars and within three years U.S. auto exports to Spain fell by 94% while imports from Britain, France, and Germany surged. Spain also raised duties on American sewing machines, razor blades, tires and tubes, and even American movies.
Benito Mussolini raised Italian tariffs on automobiles (80% of its auto imports came from the United States) and American agricultural products such as wheat and cotton, causing Italy’s wheat imports from Russia to surge instead.
Switzerland, which was hurt by Smoot-Hawley duties on watches, did not impose a formal retaliation, but its citizens organized an informal boycott of American goods which was just as effective. Portugal announced a variety of new duties on U.S. goods. All in all the European response was overwhelmingly negative and retaliatory.
Stay tuned for Part 2 of this installment where we will examine the Smoot-Hawley Tariff’s economic consequences and recent reassessments of its impact by modern-day economists.