Myths of the Smoot-Hawley Tariff
The Fifth Chapter of
How Americans Can Buy American - 2nd Edition
by Roger Simmermaker
To be able to accurately explain the effects of the Smoot-Hawley Tariff of 1930, it is necessary first to rid ourselves of popular myths so that we can start with a clean slate and derive conclusions from fact rather than fantasy. I will list some common myths here, and then disprove them using facts according to history. The myths that prevail, even today, some 72 years after the tariff bill was signed by President Herbert Hoover, are as follows:
1. The Smoot-Hawley Tariff established the highest tariff rates in U.S. history, and the sharp rise in tariff rates caused countless nations to retaliate with tariffs of their own.
2. The Smoot Hawley-Tariff contributed to the instability of the stock market.
3. The Smoot-Hawley Tariff was responsible for causing the Great Depression.
Campaigning against Herbert Hoover for the presidency in 1932, Franklin D. Roosevelt saw the tariff as a way to get a leg up on his Republican opponent's incumbent bid. Even Republicans eventually began to mischaracterize their party's former president in later years, as well as the tariff bill he signed into law in 1930. Even Ronald Reagan said "The Smoot-Hawley Tariff helped bring on the Great Depression." Someone should have told President Reagan that the Smoot-Hawley Tariff was enacted over eight months after the Great Depression. Later, the former president said "the Smoot-Hawley tariff...made it virtually impossible for anyone to sell anything in America...and spread the Great Depression around the world." Someone should have told President Reagan that over two-thirds of the goods imported into the United States entered duty-free, and that some nations actually increased exports to the United States after the Great Depression. There was actually a higher percentage of imports on the duty free list in 1930 than there were after Ronald Reagan left office. Al Gore fell for the same politically correct lie as Reagan in 1993 in his debate with Ross Perot, claiming the tariff "was one of the principle causes...of the Great Depression."
Even the Democrat Party Platform of 1928 proclaimed that tariffs were necessary to sustain "legitimate business and a high standard of wages for American labor." The platform also encouraged the equalization of the cost between production at home and abroad to "safeguard...the wage of the American laborer." Today, most Republicans and Democrats alike regard equalizing tariffs as extreme. The Reform Party is the only major party today that considers it fair and common sense to treat our own producers equally with foreign competitors in the realm of U.S. trade policy.
The confidence Hoover expressed in high tariffs in his re-election bid was echoed throughout the campaign. If the word of the day was that high tariffs had caused the Great Depression, Hoover's stance would have been obvious political suicide. Even FDR was unable to totally shake the call for high tariffs. On the campaign trail in October 1932, he proclaimed, "I favor continued protection for American agriculture as well as American industry." The creation of the myth that the Smoot-Hawley tariff caused the Great Depression would have to wait.
Regardless of how one calculates tariff rates, as either a percentage of imports where tariffs are applied or as a percentage of all imports, duty-free or not, the Smoot-Hawley tariff did not have the highest rates in U.S. history. That claim belongs to the Tariff of Abominations of 1828, which caused neither a depression nor a recession. With the belief that high tariffs cause depressions and hamper economic growth, one has to wonder why there wasn't a Great Depression of 1830? The reason is that there are several factors that cause recessions and depressions. Some of these causes will be discussed in this chapter, and revealing these factors will show that they were the cause of the Great Depression, not the Smoot-Hawley Tariff.
In their attempts to vilify Senator Smoot and Representative Hawley for supposedly proposing such extremely high tariff rates, many politicians, economists, and textbook writers seem to miss the fact that the 59.1 percent tariff rate only applied to one-third of all imports in 1932. The 59.1 percent rate is derived by using the most liberal method for calculating tariff percentages, and is actually higher than it should be. The reason the tariff was determined to be at such a falsely high level is because over 50 percent of U.S. imports were tariffed at a fixed rate. For example, if a particular good had a tariff rate of 25 cents per pound, and the product sold for a dollar, the tariff percentage was represented at 25 percent. However, with the prices falling for goods as the economy collapsed, the tariff rate would double if the value of the good was reduced by one-half. So what was a 25 percent tariff rate before the depression instantly became a 50 percent tariff, although the consumer was actually getting the same product for cheaper at the newly calculated higher tariff rate. In other words, a product that cost a dollar at a 25 percent tariff would cost $1.25, but if the price fell to 50, the tariff was still 25 cents and the product now only cost 75 cents, but the tariff rate was now calculated to be 50 percent. The Smoot-Hawley tariff actually extended the list of imports that entered the country with no tariffs at all compared to the Fordney-McCumber tariff of 1922. What the Smoot-Hawley tariff did do was raise tariffs on particular import sensitive goods, such as Canadian agriculture, that were already on the tariff list and increase the amount of goods to which no tariffs were applied.
In consistency with today, free traders historically look at tariffs (indirect taxes) on imports as causing consumers to pay more while ignoring direct taxes on American consumers. There are few that will mention or acknowledge that President Hoover raised the top income tax rate from 25 percent to 65 percent in 1932. FDR continued this atrocious policy by further raising the rate to 79 percent! This insurmountable climb in the income tax rate reaped far more damage on the American consumer than any modest tariff increase on a select amount of import sensitive items. Keep in mind that tariffs are a discretionary, indirect tax. The consumer can choose to buy the import or the domestic good, and therefore refuse to pay the tariff, but no consumer escapes direct income taxes. Everyone must pay. It's no wonder it took World War II to drag us out of the bottom of the economic barrel.
Was America the only nation to raise tariff rates before the depression? No. Many nations raised tariffs after World War I. France, Germany, Spain, Italy, Yugoslavia, Hungary, Czechoslovakia, Bulgaria, Romania, Belgium and Holland all raised their tariffs on imports to levels comparable to those before World War I. Even Britain, a free trade nation, declared that "new industries since 1915 would need careful nurturing and protection if foreign competition were not again to reduce Britain to a technological colony." The message was clear. Nations were rebuilding their industries after World War I and needed protection to re-develop them.
But what affect did the tariff have on the stock market? History shows that the crash was much more likely due to the inability of Congress to pass a tariff bill at all than because of the possibility that Congress might pass a high tariff bill. A business community and its nation perceived a lack of leadership, gridlock, and political maneuvering, rather than tending to the needs of the country. Records show that when Representative Hawley's bill passed the House Chamber five months before the stock market crashed, the Dow climbed over 5 points to 298.87. After Senator Smoot proposed an even more protectionist Senate version, the market peaked at 381 points. However, a republican Senator from Idaho, William Borah, formed a coalition of constituents to defeat the bill. On October 3, the Dow lost 15 points. The front page of the New York Times stated: "Hoover Defeated on Flexible Tariff; Coalition in Senate, 47 to 42, Takes From President Duty-Fixing Power." Although Hoover sustained veto power, the perception was that he had no majority in Congress to pass the tariff bill. Democratic Senator George Norris tacked on an agricultural subsidies program, and Senator William Borah and his coalition of agrarian Republicans took charge of writing the tariff. The stock market did not crash out of fear of higher tariffs. If anything, it crashed due to the perception that Congress lacked the discipline and leadership to pass any tariff bill at all!
Prior to the crash, the National Association of Manufacturers complained to President Hoover of the inability of business to make decisions of industrial expansion, since the tariff bill had been haggled over for five months. The Bankers Trust director and former vice-president, Fred Kent, blamed the Democratic coalition, led by Senator George Norris, for their part in the stock market crash. "Industry cannot proceed, employ men, buy and process raw materials unless it can feel confident of markets," said Kent. "There was a fear that if this [insurgent] bloc succeeded in rewriting the tariff bill in its own way, it might come to believe that it had the power to reduce tariffs." William Borah responded that if the fight of his coalition "shakes the Stock Exchange to the earth, let it go."
The volume of trade in respect to imports did drop off in 1930 after the passage of the Smoot-Hawley tariff, but what nation would not see a reduction in imports if the buying power of their citizens had just been cut in half or worse? One would think that out of the total volume of U.S. imports, during the deep depression years, import growth of non-dutiable goods would outpace those upon which duties were levied. However, this was not the case. From 1929 to 1931, the volume of both dutiable and non-dutiable imports declined almost equally at 52 percent. In fact, there were one hundred products that had higher tariffs applied to them that actually saw an increase in import volume. It is very interesting that despite the reduced buying power of Americans coupled with the fact higher import duties were being collected on some of these items, it did not eliminate the attempt by foreign producers to gain a greater share of the U.S. market. It is obvious that not only with the Smoot-Hawley tariff, but also with the preceding Fordney-McCumber Act of 1922, and basically since the first tariff in 1789, there was no decisive negative relationship between higher tariffs and import volumes.
Concerning the charge that nations enacted retaliatory tariffs against the United States for passing the Smoot-Hawley bill, historical documents do not support this view. Great Britain did not release any formal protests since it regarded the United States as a sovereign nation that did not look favorably upon other nations meddling in their affairs. Great Britain was also concerned that a formal protest might encourage still higher tariffs, which might work to the disadvantage of their exporters. Great Britain was one of America's leading trading partners, and avoided any formal protest. Sir Esme Howard, the British Ambassador to Washington at the time, informed London that "official representations...against the proposed tariff increases...[would be] a mistake."
Foreign diplomats generally avoided specific threats of retaliation against the United States since any such language would be considered an infringement upon national sovereignty, and it was not the place of foreign governments to protest the Constitutionally enacted laws of the United States. Furthermore, the word "protest" during the time of the Great Depression did not automatically express dissatisfaction with U.S. trade policy. The word "protest" usually represented the argument that treaty rights of a foreign nation had been violated.
Canada briefly discussed retaliation in 1929 with U.S. Secretary of State Frank Kellogg. Canada warned Kellogg that upwardly shifted tariff rates might result in a high probability for retaliation. Canadian Minister Vincent Massey was encouraged to release an official statement representing Canada's position, but none was ever written. Canada did not want to antagonize high tariff legislators in Congress. Instead, Massey decided to go a more discreet route via the American press. After meeting with the editor of the New York World, Massey was "impressed" by the position of the editor "that Canada will never be taken seriously by the United States...until she is prepared to strike back." I would suppose that a similar opinion is shared by the Chinese about the United States today. The United States repeatedly languishes over its huge trade deficit with China, but our market remains open to their goods while their market is virtually closed to ours. China will never take the United States seriously until we have the courage to take a stand and apply higher tariffs on Chinese goods like the Chinese have applied to our goods!
Many nations of that time embraced the idea that retaliation would be counterproductive. They feared antagonizing Congress or a grass roots brushfire of nationalistic patriotism among U.S. citizens that might lead to discrimination of their imported goods. Historical records show that the Smoot-Hawley tariff did little to encourage foreign countries to retaliate with high tariffs of their own. In May 1931, the State Department report found that "by far the largest number of countries do not discriminate against the commerce of the United States in any way." Data from the U.S. Commerce Department show that the reason for the severe drop in exports in almost every American export industry was because of economic problems related to the depression, not foreign retaliation for higher U.S. tariffs. Some U.S. exports, however, did see significant gains in foreign market share. Exports of apples, pears and grapefruits increased. Exports of prunes went up 31 percent, and exports of dried apricots soared higher by 72 percent. Exports of raw materials such as cotton and rayon held steady. Exports of American films increased 49 percent, and exports of false teeth rose 24 percent.
The assertion that the Smoot-Hawley tariff was responsible for the Great Depression is a myth based on ignorance of historical facts in favor of pursuing free-trade economic textbook theory. The Smoot-Hawley tariff pre-dated the stock market crash, and therefore could not have caused it. There is no convincing evidence that it made the Great Depression more severe, or was responsible for significant retaliation by foreign countries. There are no reputable claims of evidence that point to the Smoot-Hawley tariff of 1930 as a contributor to the second world war which occurred several years later. I have never heard or read about any German blaming America's Smoot-Hawley tariff for urging Hitler's aggression. In this case, only America blames America.
Senator John Heinz III, who died tragically in a plane crash in 1991, had developed a national reputation for his expertise in international commerce. During his years of serving in Congress, Senator Heinz III was appointed to the Chairmanship of the Subcommittee on International Finance and Monetary Policies. He had this to say about the Smoot-Hawley myth in 1985:
"It gravely concerns me that every time someone in this administration or the Congress gives a speech about a more aggressive trade policy, or the need to confront our trading partners with their subsidies, barriers to imports and other unfair practices, others in Congress immediately react with speeches on the return of the Smoot-Hawley Tariff Act of 1930, and the dark days of blatant protectionism and depression...It seems that for many of us that Smoot-Hawley has become a code word for protectionism and, in turn, a code word for the depression. Yet, when one recalls that Smoot-Hawley was not enacted until more than 8 months after the October, 1929 collapse, it is hard to conceive how it could have led to the Great Depression...the changes supposedly wrought by this single bill in 1930 appear fantastic."
It is interesting that practically every political writer today blames the Great Depression on the Smoot-Hawley tariff, but not all of them. When Robert Kuttner, editor for BusinessWeek magazine, wrote about the recent Enron scandal, he likened it to the "pyramid schemes" of the electric utilities industry of the 1920's, which, like Enron, ended up burning investors who believed in their company. The investors got "soaked" when it was too late to realize that the company was operating beyond the grasp of government regulation, which led to their collapse, and helped bring on the Great Depression. Milton Friedman has consistently maintained that the Great Depression occurred when the money supply contracted in the early 1930's. A March 2001 issue of the Wall Street Journal claimed that the Great Depression was the result of overspeculation of stock market prices by the Fed and too little attention was given to the domestic economy. In July of 2001, another Wall Street Journal column claimed that the excess capacity of world production was responsible. With the exception of these brave writers and their editorials, the majority of today's economic thinkers lay the blame squarely and solely on Representative Hawley and Senator Smoot.
However, most writers who engaged the issue closer to that era - the ones who actually lived through it - had a completely different opinion. Even after Smoot lost his Senate seat at the age of seventy to a man twenty years younger, the New York Times had much good to say about him, calling him "a statesman of the highest type." Unfortunately, with Smoot's loss, the protectionist era, America's policy since the first tariff in 1789, had ended. Speaking before the American Bankers Association in 1931, the ABA President remarked, "We, the men in this hall, who control the economic destiny of this nation, knew in 1927 that this terrible depression was coming and we did nothing about it."
Such a statement suggests that there were conditions far and above minor tweaking in U.S. trade policy that led to the Great Depression. That is why President Franklin D. Roosevelt took steps to completely restructure both America's currency and banking system by creating the Federal Deposit Insurance Corporation (FDIC) to support the national economy solely upon "the full faith and credit of the United States Government." The practice of converting U.S. currency into gold was prohibited, and gold could only be used by businesses when it was absolutely necessary for the manufacture of goods. Although the Trade Agreements Act of 1934 did allow President Roosevelt to lower tariffs, the reduction represented less than 6/100th of 1 percent of our GNP. It would therefore take an extreme stretch of the imagination to believe that this minor reduction in tariffs, in the light of all the major banking and currency reforms initiated by FDR, played a significant role in America's economic recovery.
Further analysis of the economy during the depression years reveals that nearly two-thirds of the drop in imports between 1929 and 1933 occurred prior to the Smoot-Hawley tariff.
Free traders also like to point to the writings of Adam Smith, author of "The Wealth of Nations," whose work expressed his theories on international trade in 1776. But Smith emerges as a protectionist when one reads his the following quote from his book: "Every individual endeavors to employ his capital as near home as he can, and consequently as much as he can in support of domestic industry."
In summary, just as then, we continue now to fail to recognize the dilemma that sits before us by ignoring the wisdom of the founding fathers and those like Pat Buchanan who still acknowledge and carry the spirit of their writings and speeches. We are on another unsustainable path now as we were then, but we have refused to learn from history. However, this time, when it becomes obvious that the path we are on is unsustainable, America will not be able to blame a policy of domestic protection. Free trade and free-running global commerce will be the undeniable culprit. I remain confident that America will someday have no choice but to return to a policy of protection for domestic industries. It is sad to also believe it will take a national or global economic crisis for U.S. Government to wake up and confront this issue.
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