What caused the recession of 1937-38?

Vox ^ | 11 September 2011 | Douglas Irwin

[Pelham]

“the key domino was smoot-hawley....and the sudden contraction of the money supply...”

Smoot-Hawley’s role in the Depression is vastly overrated. International trade accounted for less than 5% of GNP at that time. America was a virtually self contained economy.

But the money supply collapse over the years 1930-33 was a huge factor. A full one third of American banks failed in that span and 30% of the money supply evaporated. There was no FDIC in that era and depositors were wiped out.

[joe fonebone]

smoot-hawley started a trade war with the world....the first domino was the farmers, who exported 30% of their crops...I do not know of a business that could survive that..as the farmers failed, so did the banks they did business with...the suppliers of seed and fertilizer and farm equipment suddenly lost their customer base...they failed, and so did the banks they did business with... these businesses laid off all employees, and these employees could no longer buy anything..manufacturers of household goods started to fail, and so did the banks they did business with..

example #2 is the garment industry...the price of cotton and wool rags, used to make the thread that makes the cloth to make the garments, doubled...the manufacturers could not afford to buy the rags, and because of the wage freeze in effect, could not lower wages....they failed, and so did the banks they did business with...

tungsten for the steel industry was imported..the price quadrupled..the steel industy failed, and so did the banks they did business with..

That only 5% that you speak of were the critical components necessary for our industry and farmers at the time... smoot hawley started a trade war that could only result in our own destruction..

[Pelham]

While it was very popular for farmers to blame Smoot Hawley for their troubles the claim doesn’t fit the evidence.

American farmers had enjoyed a bubble during World War I when demand from Europe was very high and European farmers were out of business. This bubble popped after the war ended and European ag revived. American farmers were caught like homebuyers in 2007, with too much debt and falling prices. A depression in American farming was already underway in the mid 1920s well before Smoot Hawley was even proposed.

In fact Herbert Hoover ran on a tariff during the 1928 campaign because of the depression that was already going on in farming, before the stock market crash or Smoot Hawley.

Your example #2 of the rag business and wage freezes.... has what to do with Smoot Hawley? Rags were collected in this country. And wage freezes have nothing to do with a tariff.

Tungsten- metals were subject to a 33.95% tariff under the 1922 Fordney-McCumber tariff act. Smoot Hawley raised it a whopping 1.13%, to 35.08%.

http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff

An increase that small is alleged to be the cause of a quadrupling in steel prices?

“That only 5% that you speak of were the critical components necessary for our industry and farmers at the time..”

I don’t know where you can find support for the ‘critical components’ claim. Most imports of that day were popular ag products that didn’t grow here, coffee and bananas plus Canadian lumber. Farmers wouldn’t have been importing anything, other than perhaps guano and I’ve never seen a tariff on bird poop.