The Quickest Way To Another Great Depression-Protectionism

The Great Mistake
By JOHN GORDON STEELE | MORE ARTICLES BY AUTHOR
The Smoot-Hawley tariff act of 1930 was a short-term act of political assistance and a long-term disaster for the nation. Therein is a lesson.

POLITICIANS, LIKE ALL living things, pursue self-interest. Unfortunately, their self-interests may conflict. The tension often occurs between short-term and long-term interests. They have a duty to promote the long-term well-being of the country, but a powerful short-term interest in getting re-elected.

In hard times, demands for short-term help, such as for protection from "unfair" foreign competition, can become overwhelming. The result can be long-term disaster.

Just before adjourning in preparation for the election this fall, the House passed, 348-79, a bill to increase the president's power to slap higher tariffs on virtually all Chinese imports, with the aim of forcing China to revalue its artificially undervalued currency. The Chinese government, facing its own political pressures, had earlier raised tariffs sharply on imports of American chicken.

These may be nothing more than the usual spats and posturing for domestic consumption. But if the recovery continues to stall or turns into a double-dip recession, posturing could turn into policy.

WE'VE BEEN DOWN THIS UNFORTUNATE road before. Recall the Smoot-Hawley tariff, named after its chief congressional sponsors, Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon, both Republicans and both chairmen of the committees in charge of taxes.

In 1928, as Herbert Hoover campaigned for the presidency, the country was largely prosperous. But a depression was slowly spreading through the agricultural sector. European agriculture had recovered from the ravages of World War I, cutting demand for American exports. And, as more and more land once devoted to fodder crops for horses and mules was turned over to producing food for humans, the food supply at home began to seriously outstrip demand.

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Smoot (center, left) and Hawley (middle) confused their short-term interest in helping constituents with their long-term obligation not to harm the U.S. economy.
About one-third of U.S. families lived on farms, so Hoover was anxious to help. He promised that he would press Congress to pass a bill that would raise tariffs on agricultural products and thus protect the American market for American farmers.

Shortly after he was inaugurated, Hoover called Congress into special session, on April 15, 1929, to deal with the agricultural distress. He told Congress he wanted agricultural tariffs to rise while industrial ones were lowered, to keep the overall tariff burden even. In the spring of 1929, the economy was only beginning to slow. It wouldn't begin to actually contract until August. The stock market, in the midst of the most famous bubble in American history, would prove to be (for once) a lagging indicator, not peaking until early September.

REPUBLICANS HAD HUGE MAJORITIES in Congress, and Hoover, with his political capital high, should have had an easy time getting his way. But while a greatly gifted engineer and administrator, Hoover was a hapless politician. He had never held an elective office before the presidency, and his inexperience in dealing with the sharp elbows and give-and-take of electoral politics would prove his undoing.

Lobbyists immediately got to work influencing members of Congress to protect industry after industry. It soon turned into a special-interest feeding frenzy. Even tombstone makers got an increase in tariff protection in the bill that passed the House in May 1929. That measure called for sharply increased tariffs on agricultural products and on most industrial goods as well. The bill had a tougher time in the Senate, where progressive Republicans joined many Democrats in opposing higher tariffs. The Senate was unable to agree on the legislation before it adjourned in November.

By the time Congress returned in the early spring of 1930, the economic situation had changed, much for the worse. The resulting political pressure caused enough senators to switch and pass a bill, albeit one that increased tariffs less than the House bill. A conference committee then reconciled the two bills, mostly by going with the House version. The result was a bill calling for the highest set of tariffs in American history.

As the prospect of passage increased, protests from the country's major trading partners poured into the State Department. Canada, the country's top trading partner, acted pre-emptively by raising tariffs on a third of U.S. exports. And the protests weren't just from abroad. No fewer than 1,028 prominent economists signed a petition asking Hoover to veto the bill.

WALL STREET, TOO, URGED A VETO. "I almost went down on my knees," Thomas Lamont of J.P. Morgan & Co. wrote later, "to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff. That act intensified nationalism all over the world." Henry Ford went to the White House to urge a veto, calling Smoot-Hawley "an economic stupidity."

Hoover, economically sophisticated and fully cognizant of the protests from abroad, greatly feared foreign retaliation. Privately, he called the bill "vicious, extortionate, and obnoxious." But pressed heavily by his own party and many of the industries that would benefit—in the short term—from the bill, he signed it on June 13, 1930. The stock market, once again a leading indicator, immediately turned south. It wouldn't stop falling for two years—the Dow Jones Industrial Average gave up all its gains since its inception in 1896.

Other countries made good on their threats of retaliatory tariffs, and world trade collapsed. American exports had been $5.24 billion in 1929. Three years later U.S. exports were worth only $1.16 billion, a 78% decline. The Smoot-Hawley tariff would prove to be one of the major government mistakes that converted an ordinary recession into the calamity of the Great Depression.

At least Hoover, Smoot, and Hawley suffered the longer-term consequences of their folly. All three were decisively defeated for re-election in 1932.

JOHN GORDON STEELE is an author of business books, most recently An Empire of Wealth: The Epic History of American Economic Power.