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Protectionism Did Not Cause the Great Depression
American Thinker ^ | 04/2010 | Ian Fletcher

Posted on 06/06/2010 8:50:52 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; protectionism

1 posted on 06/06/2010 8:50:53 AM PDT by SeekAndFind
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To: SeekAndFind

Tariffs might not have started the Great Depression, but they sure didn’t help. Tariffs introduce market inefficiency and are a net detractor on a nation’s economy.


2 posted on 06/06/2010 8:56:27 AM PDT by RightInEastLansing
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To: SeekAndFind
I don't know anyone who says Smoot-Hawley caused the depression, the argument is that it deepened and prolonged the depression.
3 posted on 06/06/2010 8:56:55 AM PDT by Cruising Speed
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To: SeekAndFind; 1rudeboy

Bump


4 posted on 06/06/2010 8:58:48 AM PDT by jpsb
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To: SeekAndFind
Fraudulent argument

No one argues Tariffs CAUSED the Great Depression, what they point out is that tarffis did lengthen and deepen the effects of the Depression.

5 posted on 06/06/2010 9:01:35 AM PDT by MNJohnnie (The problem with Socialism is eventually you run our of other peoples money. Lady Thatcher)
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To: Cruising Speed

"In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the... Anyone? Anyone?... the Great Depression, passed the... Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act? Which, anyone? Raised or lowered?... raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression."

6 posted on 06/06/2010 9:02:19 AM PDT by dfwgator
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To: Cruising Speed

Well, whenever a discussion turns to dealing with some of the gamesmanship that occurs in Intl trade the very first thing Globalists do is wave “Smoot Hawley CAUSED THE GREAT DEPRESSION!!!” flag.

Now where this author is incorrect is in the idea that since S&H did not cause the Depression, then it would be okay to implement such across the board tariff increases and American in 2010 is very different from America 1931.

We exported most of the World’s oil in that era, today we imported far more than we export.


7 posted on 06/06/2010 9:04:30 AM PDT by padre35 (You shall not ignore the laws of God, the Market, the Jungle, and Reciprocity Rm10.10)
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To: SeekAndFind

So many straw men! I agree with the poster who pointed out that Hawley-Smoot didn’t cause, only exacerbated what should have been a cyclic downturn—probably a bit deeper than recent ones had been because an underlying agricultural downturn coincided with a major market correction (the Crash of ‘29).

The WWII argument is a strawman, too. No one argues that American trade policy caused the European war. But there is a strong argument to be made that Hawley-Smoot together with trade measures specifically aimed at Japan pushed the Japanese to adopt a more aggressive policy of colonialism in East and South East Asia, defense of which prompted the preemptive attack on Pearl Harbor.

(D*mn good thing that Yamamoto wasn’t regarded as sufficiently bushido. If he had been, they’d have carried out his whole plan, which was to attack Pearl and land a large force of marines in Hawaii to seize it. Our nearest deep-water port to the Japanese home islands would then have been San Francisco, and the Imperial Navy would have had a forward port from which to harass our forces in the eastern Pacific.)


8 posted on 06/06/2010 9:08:11 AM PDT by The_Reader_David (And when they behead your own people in the wars which are to come, then you will know. . .)
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To: Cruising Speed
"I don't know anyone who says Smoot-Hawley caused the depression, the argument is that it deepened and prolonged the depression."

The closest I've seen to that was a 1987 book that said Black Thursday was the same day that President Hoover said he would sign the Smoot-Hawley bill.

9 posted on 06/06/2010 9:13:06 AM PDT by danielmryan
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To: dfwgator
Very interesting lecture Mr. Stein


10 posted on 06/06/2010 9:28:46 AM PDT by SeekAndFind
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To: dfwgator

Classic...just classic!


11 posted on 06/06/2010 9:34:32 AM PDT by rlmorel (We arYoue traveling "The Road to Serfdom".)
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To: RightInEastLansing

President Madison advocated a mild protectionism for industries America needed to develop. That would be wise for America now that our industrial base is severely eroded.


12 posted on 06/06/2010 9:48:08 AM PDT by AEMILIUS PAULUS (It is a shame that when these people give a riot)
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To: RightInEastLansing

What about retaliatory tariffs?


13 posted on 06/06/2010 11:06:01 AM PDT by Parmy
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To: SeekAndFind

More than depression is at stake. If we had depleted our manufacturing skills and plant then relied on importing production from Germany, Japan and China, we would have lost WW II.


14 posted on 06/06/2010 11:18:32 AM PDT by ex-snook ("You will know they are Christians by their love.")
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To: ex-snook
Oh, now. China is our best friend, they have most favored nation status.

They'd never do anything like that. /s

15 posted on 06/06/2010 11:21:51 AM PDT by RegulatorCountry
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To: RightInEastLansing

Well free trade will be the death of America as we know it


16 posted on 06/06/2010 12:01:43 PM PDT by RnMomof7
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To: SeekAndFind; RightInEastLansing; Cruising Speed; MNJohnnie; The_Reader_David

Sorry the tariff really did make a difference. The Smoot-Hawley tariff was followed by a predictable cascade of international retaliatory actions among all nations. The bill exacerbated similar damage done by the Fordney- McCumber tariff of 1922.

The United States had the only sizeable economy not devastated by WW I, which could restart national economies through international trade. When the American Thinker article points to a minimum impact of international trade on the Great Depression they in fact highlight the absence of a countervailing economic process to other factors, such as our stock market collapse. There was just too little activity happening worldwide.


17 posted on 06/06/2010 12:46:22 PM PDT by Retain Mike
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To: SeekAndFind
The author manipulates the facts to suit his conclusions. People don't reponds ONLY to acts such as tariffs but to momentum as well: they have expectations.

Another, but related, point is nonlinearity, awareness of which the author does not exhibit either. When the economy is not well and you produce tariffs on top of that, those tariffs could break the "camel's back." A post-surgery pneumonia may kill a patient that would survive were he not weakened by surgery. Adding things up and discarding their JOINT effects is fallacious.

The conclusions reached by the author may still be correct, but they certainly don't follow from his simplistic arguments. "Thing should be made as simple as possible," as Einstein asserted, "but not simpler."

18 posted on 06/08/2010 4:04:58 PM PDT by TopQuark
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