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Protectionism Didn't Cause the Great Depression (The Depression's cause was monetary)
American Thinker ^ | 04/09/2010 | Ian Fletcher

Posted on 04/09/2010 9:52:32 AM PDT by SeekAndFind

The debate over free trade is riddled with myth after myth. One that keeps resurfacing, no matter how many times it is discredited, is the idea that protectionism caused the Great Depression. One occasionally even hears that this same protectionism -- specifically, the Smoot-Hawley tariff of 1930 -- was responsible in significant part for World War Two! This is nonsense dreamed up for propaganda purposes by free traders, and it can easily be debunked.

Let's start by reminding ourselves of a basic fact: The Depression's cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, causing it to pile up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a depression. For a start, it applied to only about one-third of America's trade: about 1.3 percent of our GDP. One point three percent! America's average tariff on goods subject to tariff went from 44.6 to 53.2 percent -- not a very big jump at all. America's tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases.

If Smoot-Hawley had caused a global trade disaster, it would necessarily have been by triggering a sharp decline in American imports of goods subject to the increased tariff. Did this happen? The data say no. In the words of economic historian, former member of the U.S. International Trade Commission, and avowed free trader Prof. Alfred E. Eckes,

Official data show that higher U.S. tariffs had little impact on American imports. From 1929 to 1932, imports of dutiable and duty-free goods fell almost the same percentage, suggesting that higher tariffs had little impact on most trading partners ... The sharpest drop in exports involved commodity-exporting countries, including some like Brazil, largely unaffected by higher U.S. tariffs.

World trade did indeed decline, but this was due to the Depression itself, not higher American tariffs. This is no surprise, as declines in the values of the currencies of America's major trading partners wiped away much of the effect of the tariff anyway.

In light of the facts noted above, it is, in fact, true that just about every serious economist or economic historian -- as opposed to the ideologues of the editorial pages or the think-tanks -- who has examined this question in detail has come to the same conclusion. This is not a liberal vs. conservative issue, either: Famous economists who have denied that Smoot-Hawley caused the Depression range from Milton Friedman on the right to Paul Krugman on the left.

The same fact can be ascertained by looking at Smoot-Hawley's impact on the world economy at large. As the economic historian (and free trader) William Bernstein puts it in his book A Splendid Exchange: How Trade Shaped the World,

Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States' GDP can be ascribed to the tariff wars. ... At the time of Smoot-Hawley's passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount -- 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP -- nowhere near the 17 percent falloff seen during the Great Depression. ... The inescapable conclusion: contrary to public perception, Smoot-Hawley did not cause, or even significantly deepen, the Great Depression.

The oft-bandied idea that Smoot-Hawley started a global trade war of endless cycles of tit-for-tat retaliation is also mythical. According to the official State Department report on this very question in 1931:

With the exception of discriminations in France, the extent of discrimination against American commerce is very slight ... By far the largest number of countries do not discriminate against the commerce of the United States in any way.

That is to say, foreign nations did indeed raise their tariffs after the passage of Smoot, but this was a broad-brush response to the Depression itself, aimed at all other foreign nations without distinction, and not a retaliation against the U.S. for its own tariff. The doom-loop of spiraling tit-for-tat retaliation between trading partners that paralyzes free traders with fear today simply did not happen.

The myth of Smoot-Hawley continues to poison U.S. policymaking even today, as it renders the U.S. government fearful of retaliating against problems like Chinese currency manipulation. But hopefully, the present controversy over free trade will eventually provoke enough public debate that this hoary myth can finally be put to bed forever.

Ian Fletcher is the author of Free Trade Doesn't Work: What Should Replace It and Why (USBIC, $24.95) and an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think-tank founded in 1933. He may be contacted at ian.fletcher@usbic.net.


TOPICS: Business/Economy; Culture/Society; Philosophy
KEYWORDS: depression; greatdepression; monetary; protectionism

1 posted on 04/09/2010 9:52:33 AM PDT by SeekAndFind
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To: SeekAndFind
This should be an interesting thread.

My own opinion is that the federal government should be funded chiefly by tariffs -- and if tariffs are seen as hurtful to a national economy, then this is merely another powerful argument in favor of a vanishingly small federal government.

2 posted on 04/09/2010 9:58:31 AM PDT by ClearCase_guy
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To: SeekAndFind
Oh, no, not another dreadful "Smoot-Hawley was good for you" diatribe!

Look, TAXES ARE EVIL. The fewer of them we have the better.

If I want to read justifications for more taxes all I have to do is read some Leftwingtard rag ~ they've never seen a tax they didn't like.

3 posted on 04/09/2010 9:59:25 AM PDT by muawiyah ("Git Out The Way")
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To: SeekAndFind
This ideologue is too much a true believer to see that his argument, if true, also proves that protectionism doesn't work because it doesn't affect imports. Hmmm. Maybe better take another look at that data.

But the fact is world trade fell by about half during the Depression. The fact that someone would actually trumpet the Depression years as "proof" of an argument against free trade shows the bankruptcy of the position.

4 posted on 04/09/2010 10:00:03 AM PDT by colorado tanker
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To: SeekAndFind

That makes sense.

The problem with free trade as it is practiced today, is that it is not an equal exchange of goods, allowing countries economies to specialize.

We are buying labor, which they have an abundance of, but to get it, we are transferring our manufacturing capacity and technological know how. We are buy goods, and they are turning around and using the funds to buy technology companies.


5 posted on 04/09/2010 10:05:28 AM PDT by DannyTN
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To: muawiyah
The fewer of them we have the better.

Agreed, but you are going to pay some taxes. Carrier battlegroups don't sail for free.

The questions is do you want taxes based on income or consumption, and if consumption how applied?

6 posted on 04/09/2010 10:08:06 AM PDT by Last Dakotan
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To: ClearCase_guy

Nobody claimed that Smoot Hawley caused the Depression. But it helped prevent recovery by starting a trade war.


7 posted on 04/09/2010 10:14:01 AM PDT by Daveinyork
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To: SeekAndFind
The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe.

This is part of it but it makes the same general error as many economists make; it takes a too mechanistic view of the problem. Bernanke, touted as a Depression expert, does likewise from a different perspective. In my view, the main problem was fear -- fear of the the guy who said "we have nothing to fear but fear itself." This fear was political in origin. The investing/producing sector of the population was demonized and attacked by the FDR administration at least as badly as we are now. Their expectation of worse treatment and assessment of investment risk was such that they holed up to wait out the storm. The economy shut down and stayed that way for a decade. It wasn't until 1. the exigencies of winning a war required FDR to sideline his loony-left advisors in favor of people who actually knew how things worked and 2. the Democrat stranglehold on Congress weakened that investors started to see some breaks in the threatening socialist gloom, were willing to put money and ideas at risk, and the economy finally turned back on.

8 posted on 04/09/2010 10:16:19 AM PDT by Paine in the Neck (Napolean fries the idea powder.)
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To: muawiyah
Look, TAXES ARE EVIL. The fewer of them we have the better.

I agree. I also think that a tax on one is a tax on all. Better put, a "special" tax on a small(er) group, like the notorious "rich," eventually spreads through the system until its effects are felt across the board by all taxpayers.

9 posted on 04/09/2010 10:24:05 AM PDT by NaughtiusMaximus (Don't waste your vote on a 'Rat wearing an Elephant suit.)
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To: SeekAndFind

Someone finally gets it.....Smoot-Hawley had no impact on the Depression.

Of course, the Great Depression had its roots well into the mid-1920’s, and only the most liberal/socialist Free Trade Globalist would blame an action that did not take place until 1931

Unfortunately, the Liberal Free Trade Globalists have problems dealing with the facts when presented. With the Global economy crashing....mainly due to Globalist malfeasance in free trade and other areas....continuing a policy of Free Trade is like fixing the Yugo by sucking on the exhaust pipe.

One should consider Free Trade a bad idea when people like Al Gore, Jimmy Carter, George Soros, Hillary and Bill Clinton, the late Ted Kennedy, Barbara Boxer, and many other Liberal Socialists support Liberal Free Trade Globalism.


10 posted on 04/09/2010 10:26:22 AM PDT by UCFRoadWarrior (Sarah Palin: "I support Amnesty...not Total Amnesty". I guess they sell "Diet Amnesty")
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To: SeekAndFind

Milton Friedman has stated that monetary policy by the Fed under Hoover and FDR turned a serious economic downturn into a raging economic disaster.


11 posted on 04/09/2010 10:33:09 AM PDT by Le Chien Rouge
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To: DannyTN

That makes sense.

The problem with free trade as it is practiced today, is that it is not an equal exchange of goods, allowing countries economies to specialize.

We are buying labor, which they have an abundance of, but to get it, we are transferring our manufacturing capacity and technological know how. We are buy goods, and they are turning around and using the funds to buy technology companies


Exactly...which means that “free trade” is not really “trade”. It is not an equal transaction

And, only the most extreme Liberal Free Trade Globalist thinks the trillions of dollars in trade deficit to Communist China is a good thing.....that is wealth re-distributed out of America that could have helped the US economy.

Also, by relying on foreign nations to make products...it puts the US in a national security bind if ever an emergency or war would take place.....imagine relying on the Communist Chinese for specific war materiel products....of course the Liberal Free Trade Globalists have no problems with this


12 posted on 04/09/2010 10:34:03 AM PDT by UCFRoadWarrior (Sarah Palin: "I support Amnesty...not Total Amnesty". I guess they sell "Diet Amnesty")
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To: ClearCase_guy

My own opinion is that the federal government should be funded chiefly by tariffs — and if tariffs are seen as hurtful to a national economy, then this is merely another powerful argument in favor of a vanishingly small federal government.
____________________________________________________________

I’m with you. It worked better for us when we were under that tax system through 1914.


13 posted on 04/09/2010 10:36:33 AM PDT by Woebama (Never, never, never quit)
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To: colorado tanker

He isn’t sounding like an idealogue to me. He said that only 1.3% of US GDP was affected by Smoot Hawley and that the tarrifs went up from 40% to 50%, so it was a minimal change even within that small percentage. Until someone shows me he is wrong on these facts he has persuaded me.


14 posted on 04/09/2010 10:38:35 AM PDT by Woebama (Never, never, never quit)
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To: Last Dakotan

Carrier battlegroups don’t sail for free.
__________________________________________

We could focus on defending the Republic and be less involved in defending other countries around the world. We have military in over 100 countries (or some absolutely ridiculous number) right now.


15 posted on 04/09/2010 10:40:10 AM PDT by Woebama (Never, never, never quit)
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To: SeekAndFind

Again a good review of ALL facts, like this article, demonstrates how often the maxim: correlation is NOT causation, when some facts are selected, out of the context of the whole, and, wrongly, given cause and affect status with each other.

The article shows well how trade protectionism alone could not have caused the depression.

I have read other articles that have shown that “recessions” of all types have been deeper, more frequent and more “systemic” (affecting a wider swath of economic activity), SINCE the Federal Reserve System was established that before it existed.

Apparently, the only thing the Federal Reserve System did was institutionalize the economic cycles, not end them, and it also make them more subject to the artificial manipulation of the institution - the Fed; that artificial hand cannot, CANNOT, prevent, ease, adjust and repair for the natural economic cycles better than the “unseen” hand of the marketplace.


16 posted on 04/09/2010 11:41:46 AM PDT by Wuli
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To: colorado tanker

“But the fact is world trade fell by about half during the Depression.”

Yes, trade fell, PRIMARILY BECAUSE domestic economic activity in many countries fell. People had less spending money so they bought less, which meant they bought fewer imported goods. And yes, in that way, “the depression affected trade”.

But, the decline of many states economic activity, and the decline of trade (as if it could be sustained when economic activity falls) does not prove protectionism as the cause of the major decline of trade during the depression, or as a major cause of the depression itself.


17 posted on 04/09/2010 11:54:10 AM PDT by Wuli
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To: Woebama
We could focus on defending the Republic and be less involved in defending other countries around the world. We have military in over 100 countries (or some absolutely ridiculous number) right now.

Sure, but what does that have to do with the form taxes take?

18 posted on 04/09/2010 1:01:42 PM PDT by Last Dakotan
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To: SeekAndFind

Government caused and sustained.

Close to 100% tax on capital gains and on the top marginal rates made sure the depression was sustained.


19 posted on 04/09/2010 3:21:26 PM PDT by TASMANIANRED (Liberals are educated above their level of intelligence.. Thanks Sr. Angelica)
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To: Last Dakotan
You said: Sure, but what does that have to do with the form taxes take?
__________________________________________________________

You previously said: Carrier battlegroups don’t sail for free. (as an argument against a form of taxation that doesn't generate as much revenue as the current income tax)
___________________________________________________________

I am saying I'll take the lower taxes without the world straddling colossus of a military please.

20 posted on 04/09/2010 3:41:32 PM PDT by Woebama
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To: Last Dakotan

Carrier Battle Groups should be able to be financed entirely by the beneficiaries. That’s a traditional way of doing things.


21 posted on 04/09/2010 3:56:34 PM PDT by muawiyah ("Git Out The Way")
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To: Woebama
You previously said: Carrier battlegroups don’t sail for free. (as an argument against a form of taxation that doesn't generate as much revenue as the current income tax)

Huh?

It takes a special form of lunacy to state that the words; Carrier-battlegroups-don’t-sail-for-free is an argument for or against any form of taxation.

It is simply a statement that there will be taxation.

22 posted on 04/09/2010 4:12:58 PM PDT by Last Dakotan
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To: Last Dakotan

Well, I re-read what you wrote and you are right I read too quickly and misunderstood a simple point. But . . . lunacy? Isn’t that overstating things a bit?


23 posted on 04/09/2010 5:11:03 PM PDT by Woebama
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To: Woebama

Ok, you’re not a lunatic.


24 posted on 04/09/2010 5:15:04 PM PDT by Last Dakotan
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