Week 5 Harold Allen Skinner’s Applied History Blog: The Great Depression and the Smoot-Hawley Act.
Week 5 Harold Allen Skinner’s Applied
History Blog: The Great Depression and the Smoot-Hawley Act.
Abstract:
This week’s blog will consider how
economic uncertainty created by the Smoot-Hawley Act was a causal factor in the
Great Depression. Following a historical summary, and analysis using selected
scholarly works, the blog will conclude with suggestions for follow-on
research.
Article
As historian
Michael Bernstein notes of the Great Depression, “...there exists no general
agreement about its causes, although there tends to be some consensus regarding
its consequences.” [1]
This blog cannot definitively answer the question of the causes of the Great
Depression. Instead, it will discuss contextual history, analysis and tentative
conclusions of the causes of the Great Depression through the lens of the Smoot-Hawley
Act of 1930. [2]
Before starting analysis, we first need to
review the background and history of the Smoot-Hawley Act. In the early days of
the American Republic, tariffs consisted of duties levied on imported goods,
revenue to fund operations of the federal government. By the early 20th
century, tariffs were used by Congress principally to level the competitive
playing field for American industry against foreign competitors, particularly
during times of economic recession.[3] By
1929, the American economy was doing well, with 3% unemployment, and an annual
Gross Domestic Product (GDP) of 6%. Because of various tariffs, American
manufacturers were the principal contributors to the GDP growth and
profitability of the national economy. By contrast, the American agriculture
segment was in distress. High domestic and overseas demand during the World War
years led to a major overexpansion in production, fueled by land speculation
and extensive borrowing. The natural contraction of postwar demand in the
United States, coupled with tight money and credit caused a mild recession in 1920-21.
The manufacturing sector rebounded quickly, while stagnant prices and heavy
debt caused a shock wave of foreclosures and bank failures in the agricultural
sector. Consequently, farm advocacy groups lobbied Congress for increased agricultural
tariffs, not a lowering of industrial tariffs.[4] Their
logic was questionable, as the United States was a net exporter of many crops, with
prices decided by the world market. Instead, advocates of higher tariffs argued
that reducing agricultural imports through tariffs would encourage domestic
producers of cotton and wheat into diversifying their products, thus raising
prices by reducing production. Efforts in Congress to introduce more realistic
price supports in Congress failed when a flawed compromise bill was vetoed by President
Calvin Coolidge in 1927.[5]
Calvin Coolidge, ca. 1924. Photo Credit: Library of Congress Prints and Photographs Division Washington, D.C. 20540, Digital ID: cph 3b42877 //hdl.loc.gov/loc.pnp/cph.3b42877.
Tariff reform was a central plank on the 1928 Republican platform, and Herbert Hoover was elected President based on his endorsement of tariff reforms. On 4 March 1929, Hoover called for a special session of Congress to reform tariffs to “compensate for the farmer’s higher costs and higher standard of living.”[6] The first Republican House bill of May 1929, sponsored by Representative Willis Hawley, proposed increases on agricultural and manufactured goods. The bill was passed to the Senate Finance Committee, chaired by Reed Smoot, where it lingered for 15 months, as Congressional committees negotiated over the fine points of the bill. [7]Significantly, the protracted negotiations, marked by “logrolling” or trading favors for votes, caused significant anxiety in domestic and foreign markets.[8] After a winter recess, the Senate resumed work on the bill, where despite many efforts at moderation, higher tariffs were approved on a multitude of goods and agricultural products.[9] After additional negotiations took place between House and Senate, the final bill was unified in June 1930, and sent to President Herbert Hoover for signature.
The bill was blasted by opponents who saw the tariffs would increase cost of imported goods to consumers, including farmers, without benefiting farmers with higher prices or price supports. Among the clamor of supporters and detractors was a group of more than 1000 American economists, who in May 1930 wrote a statement opposing the Smoot-Hawley legislation. Besides encouraging overproduction in the manufacturing sector, the tariffs threatened the agriculture sector with a double-blow – higher prices on manufactured goods needed to support farming, and reduced opportunities to sell in overseas markets. Warnings also came from the financial sector, who predicted that restricting foreign trade would could jeopardize the ability of those countries in repaying their war debts owed to American banks. Despite these warnings, President Hoover felt he could not repudiate his promise to sign tariff reforms, so on 14 June 1930 the White House announced his approval. Ostensibly intended to help American farmers, who only wanted subsidy support to help ease their indebtedness, the Smoot-Hawley tariff instead stood as a monument to the worst in American special interest politics.[10] A backlash against Hoover and the Republican party was a major consequence of Smoot-Hawley, which was blamed for contributing to the collapse of the world economy in the Great Depression. Presidential candidate Franklin Roosevelt made tariff reductions a plank in his platform, which was positively received in the stock markets. In 1932, Roosevelt was elected president, and both Senator Smoot and Congressman Hawley were voted out of office as voters gave control of Congress to the Democratic party. On 29 March 1934, Congress passed the Reciprocal Trade Agreement Act, granting the President the ability to adjust tariffs and negotiate bilateral trade agreements. However, the resentment generated over the Smoot-Hawley Act was such that many trading partners kept high tariffs in place well into the 1950s, despite unilateral American reductions in import tariffs.[11]
Analysis
Completely
quantifying the impact of the Smoot-Hawley Act is impossible, but some major
trends are apparent from a review of available literature. Accounting for
economic deflation, the tariff appears to have reduced imports from 12-20%.
However, total imports dropped by 40% from 1930-1932, and total imports were
only 4% of American Gross National Product (GNP)-thus the macro effects of the
tariffs were insignificant.[12]
The greater impact of the tariff was on American exports. There is evidence
that American trading partners retaliated against the new tariffs by enacting
tariffs against imported American goods. Anthony O’Brien calculated that American GDP
dropped by 16.5% between 1929-1931; of that number 3.4% was due to lessened
overseas demand. What is unclear as to
how much is attributable solely to Smoot-Hawley, or to other economic factors.[13] Despite good evidence of the Smoot-Hawley
Act's impact on the American economy, Irwin presents a summary of economic
theories before concluding the tariff had more than a minor direct role in the
Great Depression. [14]
However, one
significant factor in the onset and subsidence of the Great Depression was the
influence of fear and uncertainty. A common factor identified in the reviewed
literature was the economic uncertainty created by the drawn-out legislative
process for Smoot-Hawley. While Congress wrestled with the legislation, other
economic factors were at work. A Federal
Reserve rate increase in August 1929 triggered rate hikes and consequent
economic slowdown in other nations. Anxiety over this international recession,
and the overleveraged American economy caused wild swings in the American stock
market. On 28 October 1929, the Dow Jones Industrial Average dropped almost 13%,
triggering a massive selloff and strong demands for cash. Crucially, the crash spooked American investors
and consumers, creating a cascading effect of declining demand, slowed
production and layoffs.[15]
Economist
Christina Romer points to the major drop in spending on durable goods as a
consequence of consumer and investor fears stemming from the October crash.[16] After
leaving office, ex-President Calvin Coolidge described how the protracted
passage of the Smoot-Hawley legislation had created much uncertainty in
business and investors. As a consequence, consumers stopped making major
purchases, while investors and entrepreneurs sat on their capital. The Act did
not cause the Great Depression, but according to Coolidge, excessive government
meddling deepened and prolonged the effects.[17]
The same economic
uncertainty was felt by foreign investors and governments. American trading
partners kept close tabs on the Smoot-Hawley negotiations in Congress, and many
formally objected to the potential harm to arise from the bill. Republicans brushed off the concerns by
asserting the tariffs were a domestic matter.[18] During 1929, financing for the buying of
European products by American importers was impacted as European lenders withdrew
from the American loan market to avoid possible post-tariff price drops.[19] Once
it became likely the Smoot-Hawley bill would become law, increasingly angry trading
partners began taking action with preemptive tariffs and trade barriers. The
wave of protectionist trade actions corresponded with a worldwide economic
decline, thus making worse an already bad economic situation. As noted by
Irwin, the Smoot-Hawley Act played a minor role in the Great Depression, but its
greatest effect was to deeply damage the image of America in the eyes of its
wartime Allies and trading partners.[20]
In 1990, Christina
Romer introduced an uncertainty hypothesis to explain facets of the Great
Depression. Romer posits that fear and uncertainty were the root causes of the
otherwise unexplained drop in consumption during 1929-1930.[21] Bernstein was less certain: "But even
recent investigations have been incapable of unambiguously explaining a large
portion of the decline in spending. We can speak of a drop, but we cannot say
for sure why it happened.”[22]
Thomas Rustici supports Romer’s uncertainty hypothesis by noting how
speculators and traders shifted their investments and buying decisions well in
advance of the passage of Smoot-Hawley. The consequences of those decisions
played into the volatility of the markets in the run up to the October 1929
crash.[23]
In considering the
end of the Great Depression, Christina Romer continues her uncertainty
hypothesis in describing the sizeable inflow of gold into the United States from
foreign markets after 1933. This inflow helped the American economy recover
from the Great Depression but was only partially due to government policies. As
Romer points out, most of the gold inflow was due to the flight of capital from
Europe due to uncertainty over the prospects of peace in Europe: “The growing
threat of a European war created fears of seizure or destruction of wealth...Huge
volumes of funds were consequently transferred in panic to the United States
from Western European countries likely to be involved in such a conflict.”[24]
Conclusion
Based on the reviews of the cited
research, we can tentatively conclude that the Smoot-Hawley Act had a minor effect
on the onset of the Great Depression. However, the review of the literature
indicates an underlying component not addressed by most economic researchers,
the impact of fear and uncertainty. It appears, based on analysis of
literature, that the ambiguity surrounding the protracted passage of
Smoot-Hawley created economic turmoil that fed into the stock market, and
overseas markets. In 1929-30, this uncertainty
was a contributor to the drop in consumption, creating a cascading series of
events associated with the Great Depression.
Uncertainty also played a role in the end of the Great Depression in the
United States, brought about by a flood of gold sent by European investors
fearful of war. Future researchers should use Christina Romer’s uncertainty
hypothesis as a starting point in conducting fresh research on the causes of
the Great Depression.
Sources
Bernake, Ben.
“The Macroeconomics of the Great Depression: A Comparative Approach.” Journal
of Money, Credit and Banking 27, No. 1 (February 1995): 1-28.
Bernstein,
Michael A. “The Great Depression as a Historical Problem.” OAH Magazine of
History 16, No. 1 (Fall 2001): 3-10.
Irwin, Douglas
A. Peddling Protectionism: Smoot-Hawley and the Great Depression.
Princeton: Princeton University Press, 2011.
______. “The
Smoot-Hawley Tariff: A Quantitative Assessment.” The Review of Economics and
Statistics 80, No. 2 (May 1998): 326-334.
O’ Brien,
Anthony. “Smoot-Hawley Tariff,” Economic History Association, EH.net. 22 April
21, https://eh.net/encyclopedia/smoot-hawley-tariff/.
Reynolds, Alan.
“The Smoot-Hawley Tariff and the Great Depression.” Cato at Liberty. Accessed
21 April 2021. https://www.cato.org/blog/smoot-hawley-tariff-great-depression
Richardson,
Gary Richardson, et al. “Stock Market Crash of 1929.” 22 November 2013. Federal Reserve History, accessed 22
April 2021. https://www.federalreservehistory.org/essays/stock-market-crash-of-1929.
Romer,
Christina D. “The Great Crash and the Onset of the Great Depression.” The Quarterly Journal of Economics 105,
No. 3 (August 1990): 597-624.
Rustici, Thomas
and Roberts, Russ. “Rustici on Smoot-Hawley and the Great Depression.” EconTalk
podcast with Russ Roberts, 4 January 2010. Liberty Fund Inc.
Samuelson, Robert J. “Revisiting the Great
Depression.” The Wilson Quarterly 36, No.1 (Winter 2012): 36-43.
The Senate
Passes the Smoot-Hawley Tariff, 13 June 1930. https://www.senate.gov/artandhistory/history/minute/Senate_Passes_Smoot_Hawley_Tariff.htm
Tacoma, Thomas.
“Calvin Coolidge and the Great Depression: A New Assessment,” The Independent Review 24, No. 3 (Winter
2019/20): 361-380.
[1]
Michael A. Bernstein, “The Great Depression as a Historical Problem,” OAH
Magazine of History 16, No. 1 (Fall 2001): 3.
[2]
Bernstein, 4.
[3]
Douglas A. Irwin, Peddling Protectionism: Smoot-Hawley and the Great
Depression (Princeton: Princeton University Press, 2011), 11-12.
[4]
Irwin, Peddling Protectionism, 16-18.
[5]
Irwin, Peddling Protectionism, 25.
[6]
Irwin, Peddling Protectionism, 33-34.
[7] The
Senate Passes the Smoot-Hawley Tariff, 13 June 1930. https://www.senate.gov/artandhistory/history/minute/Senate_Passes_Smoot_Hawley_Tariff.htm
Accessed 21 April 21.
[8]
Alan Reynolds, “The Smoot-Hawley Tariff and the Great Depression,” 7 May 2016, https://www.cato.org/blog/smoot-hawley-tariff-great-depression.
Accessed 22 April 2021.
[9]
Irwin, Peddling Protectionism, 65-68.
[10]
Irwin, Peddling Protectionism, 100.
[11]
Irwin, Peddling Protectionism, 100.
[12]
Douglas A. Irwin, ”The Smoot-Hawley Tariff: A Quantitative Assessment,” The
Review of Economics and Statistics 80, No. 2 (May 1998): 333.
[13]
Anthony O’ Brien, “Smoot-Hawley Tariff,”
Economic History Association, EH.net, accessed 22 April 21, https://eh.net/encyclopedia/smoot-hawley-tariff/.
[14]
Irvin, Peddling Protectionism, 142.
[15]
Gary Richardson, et al, ”Stock Market Crash of 1929,” 22 November 2013, Federal
Reserve History, accessed 22 April 2021, https://www.federalreservehistory.org/essays/stock-market-crash-of-1929.
[16]
Christina D. Romer, ”The Great Crash and the Onset of the Great Depression,” The
Quarterly Journal of Economics 105, No. 3 (August 1990): 598.
[17]
Thomas Tacoma, ”Calvin Coolidge and the Great Depression: A New Assessment,” The
Independent Review 24, No. 3 (Winter 2019/20): 373.
[18]
Irvin, Peddling Protectionism, 145-6.
[19]
Reynolds, 5-6.
[20]
Irwin, Peddling Protectionism, 183.
[21]
Christina D. Romer, ”The Great Crash and the Onset of the Great Depression,” The
Quarterly Journal of Economics 105, No. 3 (August 1990): 602.
[22]
Bernstein, 4.
[23]
Thomas Rustici and Russ Roberts, “Rustici on Smoot-Hawley and the Great
Depression, EconTalk podcast, 4 January 2010, Liberty Fund Inc., The Library of
Economics and Liberty, accessed 20 April 2021.
[24]
Christina Romer, "What ended the Great Depression?” The Journal of
Economic History 52, No. 4 (December 1992): 773, 781.
Comments
Post a Comment