The problem with arguments about trade, IMO, is that they tend to be abstract. You brought up 1930, and I've been reading Pat Buchanan on 1930 - Buchanan is wrong, and you are right, if you don't mind a bit of a lecture.
The Smoot-Hawley tariff of 1930 wasn't the first tariff to contribute to the Great Depression. That would be Fordney-McCumber, 1922.
The economic events which culminated in the Great Depression were long and slow. Hard to see, harder to avoid, harder still to get out of.
Returning to the gold standard by the combatant nations of WWI at pre-war parity began in 1922 and was essentially completed by 1928. Central banks removed non-convertible paper from the money supply and replaced it with gold and convertible paper. The money supply was forcibly reduced in order to return to pre-war parity. This caused massive deflation, which caused nominal debts to be worth more in real terms, nominal interest rates to be higher in real terms, and nominal commodity prices to be less. This particularly hurt farmers and commodity sellers.
Agrarian nations and nations which depended on the sale of commodities for income got a double whammy, first by the deflation, then by the tariffs. Great Britain, an industrial nation, also suffered massive unemployment because the dollar-pound parity was set too high, which meant that prices in Great Britain were at least 10% too high, and so it was hard to sell British goods.
US tariffs made it hard for the nations which financed WWI by borrowing, England, France, Belgium, by borrowing from the US, and the nation which financed reparations by borrowing from the US, Germany, to repay those debts in US dollars, so they were forced to repay in gold. However, removing gold from their money supply reduced the required reserves of their central banks, which further reduced their money supply, which caused further deflation and recession.
Meanwhile, in the US, the money supply is growing until 1928 because we never went off the gold standard, and all the gold is coming here. So we aren't experiencing deflation like it is being experienced elsewhere. [In 1928 the Fed started trying to put the brakes on the stock market, but that's another story.] [The US had more than half the world's gold but did not inflate the money supply accordingly, but that's yet another story.]
Our farmers and commodity producers can't sell as cheap as foreigners who are 1) experiencing deflation, and 2) desperate, so resorting to dumping just to get dollars. US farmers, miners, lumberers, and other commodity producers are getting eaten alive by high nominal debt and low real returns.
Banks start failing in the hinterlands. US producers demand that the government DO something - and the response is Smoot-Hawley.
A contemporary economist likened the position of nations like Germany to that of a man who has a noose around his neck pulling him (obligation to repay dollars borrowed from the US to pay reparations) and a pitchfork at his chest (tariffs which won't allow him to sell his goods for dollars).
Germany was at that time the world's second largest GDP, not Great Britain. Actually all the nations in Europe which borrowed from the US to finance WWI were in the same position. And all the other nations which needed to sell to the world's largest economy were also unable to do so.
And so we had massive unemployment and recession in the rest of the world as well as bank failures in the hinterlands of the US long before Wall Street ever noticed anything.
Smoot-Hawley was just the icing on the cake. This is, IMO, the major problem with tariffs. The consequences are unforeseeable. Also, other countries which have lower prices may well be in dire straits themselves, so tariffs further destabilize them, which isn't a good idea if you want them to be a market for your own goods. |
