Forgotten Facts About Smoot-Hawley for the Stimulus Package Buy American Crowd

The Republican Party of the 1920's swept into power during a financial crisis. Errors in the Fed’s monetary policy in 1919 in kept rates too low to benefit the sale of Victory bonds. The Fed then tightened excessively due to inflation, creating a financial shock and depression from 1920 to 1921.

At that time, the Republican Party viewed increasing tariffs as good policy. Thus, during the sixty seventh Congress, the Emergency Tariff Act of 1921 was passed as a temporary measure until a more comprehensive measure could be drafted. Ultimately, Fordney-McCumber passed in 1922, imposing an ad valorem rate of 34%, higher than the previous high water mark of the Payne-Aldrich Tariff of 1909. Notwithstanding, the United States trade balance continued to decline until 1924, the same year marginal tax rates were decreased.

The recovery from the 1920-1921 depression had proceeded smoothly with moderate price increases. Ad valorem tariff rates stayed basically stable during the 1920’s . Much can be said about what in this day we would call the “conservative” leadership of Coolidge during this time. Coolidge succeeded to the Presidency upon the August 2, 1923 death of Warren Harding. He kept the Harding administration intact, including his Commerce Department Secretary, Herbert Hoover.

Coolidge's taxation policy was that taxes should be lower and that fewer people should have to pay them. Just before the 1924 Republican Convention began, Coolidge signed into law the Revenue Act of 1924, which decreased personal income tax rates. In addition to tax cuts, Coolidge proposed reductions in federal expenditures and retiring some of the federal debt. He declined to sign several Congressional spending bills. He vetoed the proposed McNary-Haugen Farm Relief Bill of 1926, designed to allow the federal government to purchase agricultural surpluses and sell them abroad at lowered prices, declaring that agriculture must stand "on an independent business basis," and said that "government control cannot be divorced from political control." When Congress re-passed the McNary-Haugen bill in 1927, Coolidge vetoed it again.

Coolidge declined to run for reelection in 1928, leaving the door open for Commerce Secretary Hoover. Hoover was already a national figure and former Presidential candidate, with Woodrow Wilson having privately preferred to him as his successor and a possible Democratic Party presidential candidate in 1920. Although he was registered as a Republican, he had already bolted the party once in 1912 to support Theodore Roosevelt's "Bull Moose" Progressive Party. Hoover chose not to run, believing that 1920 would be a Republican year. During the Harding administration, Hoover promoted the Commerce Department as the hub of the nation's growth and stability through European “associationalism.” Coolidge called him, “Wonder boy” and also quipped that, "for six years that man has given me unsolicited advice—all of it bad."

Reed Smoot was a banker and wool manufacturer. He became Senator from Utah in 1903 while the nation was operating under the Dingley Tariff of 1897, at the time the highest in the nation's history. Smoot obtained an appointment to the Senate Finance Committee in 1908. When Democrats took the presidency and both houses of Congress in 1912, tariffs were sharply reduced. Following the return of the republicans in 1920, the 1923 the Fordney-McCumber Tariff raised tariff rates again, including those on Cuban sugar, a direct competitor with Utah's beet sugar industry, and wool, another Utah industry.

Willis Hawley came to Congress from Oregon in 1907. Willis Hawley ascended to Chairman of the Committee on Ways and Means during the uneventful Seventieth Congress, which met during the last two years of the second Coolidge term.

1927 The Fiat Company, Italy's leading automobile manufacturer, begins pushing Italian government to increase duties on American automobiles and automobile parts, out of frustration for losing to American competition.

1928 Republicans and Democrats both campaign on protectionist platforms. Herbert Hoover is the Republican candidate for President; the Democratic Party nominates Al Smith.

Nov. 6, 1928 Hoover is elected president, carrying 40 of 48 states. Republicans do well in the congressional elections: +30 in House for 267-167 majority, +7 in Senate for 56-39 majority.

Dec. 5, 1928 House Ways & Means Committee authorizes notice of public hearings on tariff. Fourteen subcommittees will take testimony, and hearings will cover all commodities.

1929 Italian media launches campaign against purchasers of American automobiles and automobile parts. Representatives from various Swiss industries begin circulating flyers encouraging the support of European automobiles and other products, while avoiding the support of American industries.

Jan. 7, 1929 House Ways & Means Committee begins hearings. Rep. Willis Hawley (R-OR) is chair.

Feb. 27, 1929 House Committee hearings conclude, after nearly 20,000 pages of testimony and 1100 witnesses.

Mar. 4, 1929 Hoover is inaugurated. Inaugural address calls for limited tariff revisions.

March 8, 1929 Canada proclaims its Canada First policy, that in the interests of Canadian industries, Canada will not seek to continue trading with the United States if the United States continues to show resentment and antagonism with regards to trade with Canada.

Apr. 15, 1929 Extra congressional session convenes (71st Cong., 1st session), called by Hoover to help farmers and make limited tariff changes.

May 7, 1929 Bill is reported to House by the Ways & Means Committee, having been written entirely by Republican members of the committee. Some Republicans are unhappy: agricultural states want higher rates on butter/casein/flaxseed, lower rates on brick/cement/lumber/shingles; California wants duties on figs/dates/hides/long staple cotton; the Northeast wants duties on boots/shoes/leather; etc. At this time, no official protests have been received from foreign nations.

May 23, 1929 Republican committee members come up with ninety-one compromise amendments designed to guarantee Republican unity.

May 28, 1929 Tariff bill is passed by House 264-147. Only 12 Rs vote against; 20 Ds vote for.

May 29, 1929 Bill is referred by Senate to Finance Committee. Sen. Smoot (R-UT) is chair.

June 17, 1929 Sen. Borah (R-ID) moves for “sense of the Senate” resolution to have tariff revision limited to agriculture; fails 39-38. Hoover notes that he convened Congress in order to pass limited changes, but “in considering the tariff for other industries than agriculture, we find that there have been economic shifts necessitating a readjustment of some of the tariff schedules.”

June 19, 1929 Congress takes recess for summer. Senate Finance Committee continues working on tariff bill.

July 18, 1929 Senate Finance Committee hearings conclude. To date, a total of 38 nations have sent formal protests against the Tariff to the Department of State

July 22, 1929 Senate Finance Committee begins meeting in executive session to redraft bill.

Oct. 2, 1929 Senate passes amendment removing President’s ability to set flexible tariff schedules; instead, Tariff Commission’s recommendations will be acted on by Congress. Thirteen insurgent Rs join 34 Ds in passing amendment, 47-42.

Oct. 19, 1929 Senate passes amendment adding farm debenture rider to tariff bill. Debentures will provide export subsidies for farmers. Fourteen insurgent Rs join 28 Ds in passing amendment, 42-34.

Oct. 22, 1929 Senate finishes debating administrative provisions, moves on to rates. Coalition of Ds + insurgent Rs is in control, forces (mostly) lower rates. Passage appears to be a virtual certainty

Oct. 29, 1929 Stock market crashes on Black Tuesday. The Dow-Jones Industrial Average drops 12% as 16.4 million shares are traded.

Nov. 22, 1929 Despite Hoover’s urgings, Senate adjourns without passing tariff bill. >p> Dec. 2, 1929 Regular congressional session convenes (71st Cong., 2d session). Dec. 11, 1929 Former tariff lobbyist Joseph Grundy is appointed as Pennsylvania's junior Senator.

Jan. 17, 1930 After six days of debate, Senate votes to reject House’s proposed tariff raises on sugar. Vote is 48-38; eighteen insurgent Rs join 29 Ds.

Mar. 5, 1930 Amid charges of vote trading, Senate reverses position on sugar; 38 Rs and 9 Ds vote to raise sugar tariffs.

Early Mar. 1930 Coalition of sugar, oil, lumber, and cement interests gain control in Senate; they start raising rates on numerous commodities, including items already voted on previously.

May 5, 1930 1028 American economists send letter to President Hoover asking him to veto tariff bill.

May 13, 1930 Conferees deadlock: Senate has instructed its conferees to keep debenture plan and strike down flexible provision, but House has voted to strike out debenture plan and keep flexible provision. To date, 33 nations have sent formal protests to Congress in opposition of the Tariff.

May 19, 1930 Senate agrees to recede: debenture plan is struck down by 43-41 vote, and VP Curtis casts deciding vote after 42-42 vote on flexible provision.

June 9, 1930 After some back-and-forth between conference and Senate, completed conference report is filed. To date, 59 nations have sent formal protests to Congress in opposition of the Tariff.

June 13, 1930 Senators Reed and Grundy criticize conference report but decide to accept. Senate adopts conference report, 44-42.

June 14, 1930 House adopts conference agreement, 222-153. Vote is largely along party lines: only 14 Ds vote for, only 20 Rs vote against.

June 18, 1930 Tariff goes into effect at 12:01 a.m. Word begins to travel through Switzerland to boycott American products.

Nov. 1930 France signs concession treaty with Spain, thereby negating the effects of the Wais Tariff on France.

Sept. 17, 1930 Canada enacts Canadian Emergency Tariff, increasing tariffs virtually across the board by 50%.

Nov. 30, 1931 Great Britain enacts Abnormal Importations Act, allowing the Board of Trade the ability to adjust duties up to 100% on any product it wishes.

Feb. 1932 Great Britain enacts Import Duties Act, imposing a general tariff of 10%.

Mar. 1932 Italy signs concession treaty with Spain, thereby negating the effects of the Wais Tariff on Italy.

We can agree that there is no universal agreement about the effect of Smoot Hawley.

The usual summary measure of tariff protection is the ratio of total tariff duties collected to the value of imports. This measure overstates the impact of Smoot-Hawley because most of its provisions were specific - an amount per quantity - rather than ad valorem - a percentage of the value. During the early 1930s prices declined, while the specific tariff did not. Thus the overstatement, if you use U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970 as the basis for comparison.

As a result, the U.S. Tariff Commission created the Tariff Review, July 1930 study, which calculated the ad valorem rates that would have prevailed on actual U.S. imports in 1928, if the Smoot-Hawley rates been in effect then as compared to the Fordney-McCumber rates. They found an aggregate increase of 2 1/2 %.

I think the major point is that tariffs were stable for the previous decade. Your argument seems to bethat that a tariff will not affect the overall level of employment in an economy over the long run. However, in the case of Smoot-Hawley it precipitated a trade war, which damaged exports. Between 1929 and 1931, real exports declined by an amount equal to about 1.7% of 1929 real GDP. This decline amounts to 21% of the total decline in real GDP over the same period.

Furthermore, you cannot really compare the effect of increasing tariffs year over year throughout the 30’s without controlling for the compounding policy errors such as:

(1) Taxes - Hoover’s Revenue Act of 1932 raised the top marginal income tax rate from 25 percent to a whopping 63 percent and imposed new and increased excises taxes. FDR followed in Hoover’s footsteps and then some, raising taxes in 1934, 1935, and 1936. These included tax increases on personal income, corporate income, capital gains, estates, gifts, and corporation excess profits. Most debilitating was Roosevelt’s undistributed profits tax that squeezed capital out of businesses by taxing corporate savings.

(2) Spending. Hoover and then FDR, with far more agressiveness, funded spending programs with new taxes or borrowed money that drained sorely needed money from the private sector.

(3) Labor. FDR’s signing of the Wagner Act in 1935 created the pro-labor National Labor Relations Board and drastically expanded labor unions’ ability to organize, strike, and boycott.

(4) Regulation. New government interference devastated business in the 1930s, starting with Hoover’s insistence on keeping wages steady despite rapidly declining prices. FDR’s National Recovery Administration (NRA) imposed price controls, minimum wage rules, health requirements, labor laws, and production quotas. At a time when struggling businesses needed the flexibility to innovate and cut costs, Roosevelt’s regulations made it impossible for them to do so. On the contrary, these regulations imposed new and often onerous costs, resulting in persistently high unemployment and the failure of many businesses.

The economy was sliding into depression...what would you expect? As a scientist, I tell you this is at best a correlation and not a good one. You can’t draw conclusions about the affect of Smoot-Hawley as there are many factors which are not considered that could and did affect Wall Street. This chart assumes that Smoot-Hawley was the only factor affecting the Dow-erroneously.

Economist who create charts to prove the disastrous affect of Smoot-Hawley in either creating or prolonging the depression use only data favorable to their point of view-ignoring all other data. They are not truly interested in the truth...only in furthering their political point of view on trade...all trade good/tariffs bad. I have looked at the raw data...I do not believe that Smoot-Hawley created or prolonged the depression.

If one of my former students had presented me with a chart similar to the one included in your post-using an invalid assumption and eliminating all unfavorable data, I would have failed him/her.

Well Professor, I would hope you examine your student's project closely enough to determine whether the data presented supports, rather kicking out a failing grade for work that does not conform to your ideological preference. Frankly, I would not purchase your services, if I were a student, given your lack of attention to the point I supported in posting this chart. Gladly, I am no longer a student, for if I were, I would give you flawed work that pleased you, so that I would get a better grade. But enough commentary on the sad state of your profession.

Granted, this chart is not very good because it does not show daily data points. It does show enough, however, to support the proposition for which I posted it: "The Dow Jones Industrial Average sank a full 8%, from 250 to 230, over just two trading days in June 1930, in direct response to the Senate’s passage of Smoot-Hawley and Hoover’s announcement that he would sign it." I have argued nothing more than that. So what's my grade now?

I have looked at the raw data...I do not believe that Smoot-Hawley created or prolonged the depression.

I am interested in the data supporting your postulation. I think you are wrong - unless of course you mischaracterize my argument as being that Smoot-Hawley was the sole cause of the Great Depression. It was not. It was, however, a significant contributing factor in triggering its commencement and deepening the initial ensuing deflation.

Smoot-Hawley created repercussions in exports when other countries retaliated - Between 1929 and 1931, real exports declined by an amount equal to about 1.7% of 1929 real GDP. This decline amounts to 21% of the total decline in real GDP over the same period. How is this inconsequential?

Based on your original post, you believe restricting trade caused the decline in the market...IE imposition of tariffs. This is not true. President Hoover wanted a rather flexible tariff-one that could react to market conditions. He was opposed in the Senate, by a bi-partisan group who supported agriculture. However, both believed in restricting trade. The market rose when it looked like Hoover would prevail and declined when it looked like he would fail.

You could say, in truth,on June 9th and 10th the market declined upon the expectation of President Hoover signing Smoot-Hawley. This would be true and is backed up by data. What you can not conclude however, is that it was the trade restriction aspects of the bill that caused the decline because the street favored President Hoover’s bill which restricted trade also. the market had actually been up when it looked like President Hoover’s trade bill would be implemented. Thus those who claim the DOW declined because the notion of tariffs was somehow repugnant to the market of the 1930’s are incorrect. They didn’t like this particular version of the legislation (both restricted trade), and one can reasonably conclude that had President Hoover’s version been adopted the Dow would not have declined even though it did impose tariffs.

The free traders who use the graph you provided to ‘prove’ that restricting trade caused the DOW to decline in June 1930 are wrong. If one of my students had studied this issue and proclaimed that the implementation of tariffs caused the June decline in stocks and failed to notice the Smoot-Hawley battle in the senate-not to mention the market reaction-up and down beginning in January 1929 ...I would think they had not been thorough in their research and had reached unwarranted (by the data available)conclusions.

Trade was 6% of GNP in 1930-very limited. Those who argue that trade restrictions caused or prolonged the depression refuse to consider this...one of those pesky variables overlooked by the free trade crowd. I have looked at all sorts of charts, graphs and data about this...I see no reason to believe trade issues had anything to do with the cause or length of the depression.I view it as one giant excuse from the financial community. Wall Street reckless trading and the Fed’s monetary policy damaged the economy of the 1930’s and caused the depression. I will look up some of the links I used in this research and send them to you when I have time since you are interested.

I don’t see that correlation, but I am open to hearing your argument. Here is what I am seeing – October 18 Dow is 333.29. October 19 Senate adds the debenture to the bill, which gives direct transfers to southern farmers. Dow falls to 323.23 October 23 Having satisfied agrarian interests, the committee begins to rapidly dispense with rates - passage is a certainty. 21 Nations have already made objections to the Tariff in its present form. Dow falls to 305.85. The rest is history.

What you can not conclude however, is that it was the trade restriction aspects of the bill that caused the decline because the street favored President Hoover’s bill which restricted trade also. the market had actually been up when it looked like President Hoover’s trade bill would be implemented. Thus those who claim the DOW declined because the notion of tariffs was somehow repugnant to the market of the 1930’s are incorrect. They didn’t like this particular version of the legislation (both restricted trade), and one can reasonably conclude that had President Hoover’s version been adopted the Dow would not have declined even though it did impose tariffs.

I am seeing just the opposite here. The Dow reached a high for the year of 294.07 on April 17. Thereafter, the French increased their tariff on automobiles to a by wieght system. Toward the end of the month, the Tariff bill seemed to be stalling. As a result, "President Hoover last week took a hand to speed the Tariff Bill to final enactment" by inviting conferees to a White House breakfast.

http://timeinc8-sd11.websys.aol.com/time/magazine/article/0,9171,739145,00.html

The Dow sells off to 259.68 by May 5.

Here is what I posted above: "Between 1929 and 1931, real exports declined by an amount equal to about 1.7% of 1929 real GDP. This decline amounts to 21% of the total decline in real GDP over the same period."

Here is your critique: Also, how could something (Trade) that was but 6% of GNP cause a 20 % decline in GNP...it couldn’t and didn’t.

I said nothing about a decreases in trade causing 20% decline in GNP. I described the maximum portion of the two year decline in REAL GDP may be attibutable to the trade war Smoot-Hawley engendered. So your critique is correct - Trade did not cause a 20% decline in GDP. But I never said that. You should read a little more carefully Professor.

Real GDP declined by about 16.5% between 1929 and 1931. Over the same period of time, Real Exports declined $5.9 bln to $4.1 bln. This Real Exports decline amounts to about 1.7% of 1929 Real GDP.

I will grant you that not all of this cane be laid at the feet of Smoot-Hawley retaliation, because as deflation takes hold, and incomes in Canada and England decrease, exports decrease. However it is telling that Real Exports decreasing rapidly at first, $1 bln year over year 1929-1930, and then slow, to $.8 bln 1930-1931. The data therefore supports that retaliation had an immediate effect. This correlates with the anecdotes appearing on the timeline in my original post listing the Spanish WAIFF Tariff Act, the Canadian Emergency Tariff Act, etc., all of which follow the implementaiton of Smoot-Hawley.

Because decline in real exports measures an aggregate expenditure, you need to apply a multiplier to account for the velocity of money. In this case, the most reasonable multiplier is 2. So the 30% decline in Real Exports from 1929 to 1931 probably accounts for a real GDP decline of 3.4% from 1929 to 1931. So, 21% of the 1929-1931 Real GDP decline is attributable to declines in Real Exports.

Just to put some emphasis on the impact of the 1929 decline in real exports, consider what the evaporation of .97% of 2008 GDP, or 138.647 billion, would bring.

I see you point a little better, however, after the crash of 29 and with a worldwide depression beginning...one would expect exports to fall as they have during our downturn-not increase.If you look at exporting countries today...including China and Japan, you can see this. There is a move to go home and hunker down in your country....as protests/some riots have demonstrated in Europe during this downturn. Also, if GDP (GNP) contracted and it did in the 30’s...the 6% exports of 29 would have increased the percentages per GDP; however, there is no reason to believe exports would not have decreased as well as you pointed out. Also, between 1930 and 1932...the economy was in a deflationary free fall and would likey have continued even if Smoot-Hawley had not been enacted. Thus there is no real evidence that Smoot-Hawley had any effect on the real economy...It did affect the market in June...but not because of the tariffs...both Hoover’s bill and the opposition bill had tariffs. The market just didn’t like the opposition bill. The market actually had risen between January 1929 and June 1939 during times when it looked like Hoover’s legislation would be enacted.

This is why when Smoot-Hawley is used as an example of the dire consequences of protectionism...I must disagree. It is impossible to calculate the losses if any incurred by implementing Smoot-Hawley without considering other factors which free traders never consider such as deflation, unemployment, worldwide depression factor etc.

I see no evidence today that free trade has done this country much good and believe much of our present economic problems are the result of turning to a consumption/service economic model. The jobs created (less then the amount lost) are worth less in terms of wages and benefits...health care for children went through this year. Why? Millions of parents have lost jobs which used to provide such benefits. Also, other nations have erected trade barriers against our products while demanding that they have free access to our markets...ridiculous. Perhaps if we had a backbone and forced other countries to play fair, it would be different. No administration has ever done this-Democrat or Republican. It is a sad day for this country when retail is the largest private employment sector (government is #1- including post office) and speaks volumes as to how far we have really fallen.

Thus, the few manufacturers left must compete with socialist countries (Japan, Kore leftea and Europe, India etc) that provide social benefits such as health care and retirement while our companies must include such benefits in the price of manufacturing their products. We compete against communist China as well...they use both slave and child labor. Also, India got caught on Friday using child labor...the children were ‘rescued’). Most of the above mentioned countries ‘partner’ with their manufacturers in meaningful ways...so our industry is forced to compete against countries really and subject to regulations by our government that foreign competitors need not meet. The custom car legislation for California and other states is a prime example...Europe, Korea and Japan will not be subject to this law. Now, this will undoubtedly increase the sticker price of an American car in these states so consumers will buy the less expensive foreign cars...Japan also gives $1500.00 to their companies for each car sold in the US...it may be more now with the downturn.

The point is that free trade has destroyed most American manufacturing. Millions of good paying jobs with benefits are lost-replaced by inferior jobs both in terms of wages and benefits. It is the biggest fraud ever perpetrated on this nation and will leave us dependent-both in terms of the economy and in terms of national security.

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