Debunking The "Smoot-Hawley Caused The Great Depression" Myth

Vanity | February 4, 2009 | UCFRoadWarrior

[UCFRoadWarrior]

"The Smoot-Hawley Tariff Act caused the Great Depression" as a number of talk-radio show hosts, politicians, and cable news channel reporters have lamented in recent weeks.

"The 'Buy American' clause in the Stimulus Bill will be another Smoot-Hawley" rails others.

Did Smoot-Hawley cause the Great Depression? The answer to that is "no".

Did Smoot-Hawley continue the Great Depression. The answer to that is "no", also.

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When it was announced last week that the proposed "Stimulus Bill" would contain a "Buy American" clause, every advocate of Free Trade...from conservative GOP members to Socialist European Union politicians...decried the "Buy American" clause, claiming it would affect Free Trade, lead to a "trade war", and, also lead to another depression "like Smoot-Hawley did in the 1930's"

However, there is no evidence the Smoot-Hawley Tariff Act caused the Great Depression, nor, did it exacerbate the Great Depression.

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The Smoot-Hawley Tariff Act, passed in the summer of 1930 in the wake of the Great Depression, was an attempt to try to preserve American industry from further economic erosion during the worst economic crisis in United States' history. The tariff was designed to protect American industry from potential predatory trade practices from foreign nations, mainly European (which was still reeling economically from the aftermath of World War I).

In recent years, the Smoot-Hawley Tariff Act has been the de facto "Economic Bogeyman" for the Free Trade and Globalist crowd. In the wake of the worldwide economic failure, the Free Trade advocates are looking for cover in the wake of huge national trade deficits, growing wordlwide unemployment, and a collapsing world banking system.

Smoot-Hawley has been their proverbial whipping boy.

However, the economics do not back up the negative assertions from its critics.

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In the following chart, you will see that the Smoot-Hawley Tariff Act had no real negative effect on the economy. In fact, in most years that Smoot-Hawley was in effect (1930-1945), the US national Gross Domestic Product actually GREW.

(Note that 1929 figures are included, as this was the year of the Stock Market Crash)

Table format

I Gross domestic product

II Personal consumption expenditures

III Gross private domestic investment

IV Exports

V Imports

VI Government consumption expenditures and gross investment

(Figures in billions of dollars)

I II III IV V VI 1929 103.6 77.4 16.5 5.9 5.6 9.4 1930 91.2 70.1 10.8 4.4 4.1 10.0 1931 76.5 60.7 5.9 2.9 2.9 9.9 1932 58.7 48.7 1.3 2.0 1.9 8.7 1933 56.4 45.9 1.7 2.0 1.9 8.7 1934 66.0 51.5 3.7 2.6 2.2 10.5 1935 73.3 55.9 6.7 2.8 3.0 10.9 1936 83.8 62.2 8.6 3.0 3.2 13.1 1937 91.9 66.8 12.2 4.0 4.0 12.8 1938 86.1 64.3 7.1 3.8 2.8 13.8 1939 92.2 67.2 9.3 4.0 3.1 14.8 1940 101.4 71.3 13.6 4.9 3.4 15.0 1941 126.7 81.1 18.1 5.5 4.4 26.5 1942 161.9 89.0 10.4 4.4 4.6 62.7 1943 198.6 99.9 6.1 4.0 6.3 94.8 1944 219.8 108.7 7.8 4.9 6.9 105.3 1945 223.1 120.0 10.8 6.8 7.5 93.0

NOTES:

Although trade declined after the Smoot-Hawley passage...and the GDP dropped each year between 1929 through 1933...the biggest percentage declined was in Gross Private Domestic Investment...it was not in trade. Private investment started to disappear in the US before Smoot-Hawley passage.

Also, trade was a small part of the US GDP before Smoot-Hawley. In 1929, the combined exports-imports were just over 10% of the GDP (well below today's current percentage of trade compared to GDP). Even if trade went to zero in the early Great Depression years, that would not explain the larger percentage drop in GDP (which was due mainly due to bad financial and business practices...pre-1929).

However, in years 1933-1937, the US GDP began to rise...and in much greater percentage than the total trade output. If Smoot-Hawley truly continued the Great Depression...why did GDP rise while trade not so much? If Smoot-Hawley truly continued the Great Depression...there would not have been the GDP growth.

1938 is an interesting year, because the GDP actually dropped from 1937 levels. Trade numbers also dropped....even though the overall tariff from Smoot-Hawley DROPPED from over 19% to over 15%. The reduction in tariff did not help the economy that year.

In 1939 and 1940, the GDP grew, while the trade totals still remained lower than before Smoot-Hawley. The percentage of trade-to-GDP continued to be smaller than in 1929

1941 saw the GDP finally eclipse the pre-1930 levels...while overall trade was much lower than pre-1930...Smoot-Hawley was still in effect at the time.

1942-1945 saw massive growth in the GDP, as the US was spending heavily on the World War II war effort. The percentage of trade-to-GDP continued to drop, with Smith-Hawley still in effect. It should be noted that, with World War II taking place, trade worldwide was affected.

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While Smoot-Hawley did not help the economy prosper, it certainly did not cause, nor continue, the Great Depression, as critics claim. In most years the GDP still rose, with trade restrictions in effect.

In the first year after the rate of tariff on Smoot-Hawley decreased (1938, after it was decreased in 1937)...the level of trade and the GDP dropped. The drop in trade and GDP in 1938 demonstrates even strongly that lower tariffs did not lead to economic gain.

Critics of protectionism and favorable national trade practices will need to find a new "Economic Bogeyman". The evidence does not support that Smoot-Hawley caused the Great Depression, nor continue it.

Unfortunately, as current Free Trade and Globalist practices continue to lead to worldwide economic failure, those ignorant of the real history of the Smoot-Hawley Tariff Act will continue to critique, without presenting the facts.

The facts do not support their thesis...and the constant misinterpretation of facts regarding Smoot-Hawley well demonstrate the inability of those Free Traders and Globalists who cannot provide any explanation to why current international Free Trade practices have not worked.

[nyconse]

So what about countries like Korea that have trade barriers against us...should we let them continue to trade in the US while protecting their markets? How does this benefit the US?

[nyconse]

You assume that Smoot-Hawley caused this. It did not. It is natural for countries to move to protect their market in times of economic stress. It’s happening now.

[Gondring]

Don’t you love the use of GDP? Transporting stuff around America boosts GDP, even if nothing is actually “produced”...it’s more an indication of spending, not actual production in an economi-health sense. We could regress severely while staring at our navels while the GDP skyrocketed...and the rest of the world left us behind.

[familyop]

You’ll find some of the more relevant numbers from your chart below, UCFRoadWarrior, in a somewhat more readable format. Please FR-mail your source to me, if it’s online. In the future, at least one of us will help you with HTML formatting of online information. And do cite sources.

Less than four years was actually pretty quick for economic improvement from the Smoot-Hawley Act. Imports and exports even went up. As for the various political propagandists for the thieves these days, they do make us angry. We’re not as stupid as they are.

(Figures in billions of dollars)

Gross
domestic
product

1929: 103.6
1930: 91.2
1931: 76.5
1932: 58.7
1933: 56.4
1934: 66.0
1935: 73.3
1936: 83.8
1937: 91.9
1938: 86.1
1939: 92.2
1940: 101.4

Personal
consumption
expenditures

1929: 77.4
1930: 70.1
1931: 60.7
1932: 48.7
1933: 45.9
1934: 51.5
1935: 55.9
1936: 62.2
1937: 66.8
1938: 64.3
1939: 67.2
1940: 71.3

Gross
private
domestic
investment

1929: 16.5
1930: 10.8
1931: 5.9
1932: 1.3
1933: 1.7
1934: 3.7
1935: 6.7
1936: 8.6
1937: 12.2
1938: 7.1
1939: 9.3
1940: 13.6

Exports

1929: 5.9
1930: 4.4
1931: 2.9
1932: 2.0
1933: 2.0
1934: 2.6
1935: 2.8
1936: 3.0
1937: 4.0
1938: 3.8
1939: 4.0
1940: 4.9

Imports

1929: 5.6
1930: 4.1
1931: 2.9
1932: 1.9
1933: 1.9
1934: 2.2
1935: 3.0
1936: 3.2
1937: 4.0
1938: 2.8
1939: 3.1
1940: 3.4

Government
consumption
expenditures
and
gross
investment

1929: 9.4
1930: 10.0
1931: 9.9
1932: 8.7
1933: 8.7
1934: 10.5
1935: 10.9
1936: 13.1
1937: 12.8
1938: 13.8
1939: 14.8
1940: 15.0

[nyconse]

Name an industry which was hurt...not auto’s they use American steel in this country for manufacturing when the big three go down ... then say goodbye to steel and about 3-5 million jobs minimum.

[LowCountryJoe]

So what about countries like Korea that have trade barriers against us...should we let them continue to trade in the US while protecting their markets? How does this benefit the US?

Emphatically, yes!

If another country's government wishes to cause economic damages on itself, why should we follow suit and cause damages to ourselves? It like saying, "Oh, you want to hit yourself in the head with a hammer, do ya. Well, I'll show you. I've got my own hammer, see, watch me do this better than you can!"

[nyconse]

If these economist and free traders are so smart then why are we on the verge of depression...our industries destroyed and our people turning to socialism as there only means of survival in a free trade world. Why are we not the wealthiest nation anymore...China protects its market and exports manufactured goods...they have cash, we don’t.

[nyconse]

Dumping is used to drive competition out of business...like the garment industry, electronics, auto’s etc. It’s working.

[nyconse]

This means the GDP numbers are worse than they would like us to believe.

[familyop]

Sandy formatted the chart nicely in comment #140. Thanks, Sandy.

Everyone needs to see such charts with sources and good formatting, pissant. The year to come will be a window of opportunity to give Americans a big heads-up as to what's going on.

[nyconse]

They are not causing economic damage to themselves...they are protecting their money making industries...so by your standards...other countries can refuse to take our products and dump their products on us...and this is good for us? You believe in one way trade...well if top economists who advise our presidents think like you...no wonder this country is so screwed.

[cripplecreek]

And yet none of that has anything to do with the fact that he imposed tariffs on cars, motorcycles, steel, semiconductors and other things.

Fact is that so called “free trade” of today is nothing but international corporate socialism.

[LowCountryJoe]

Dumping is a term used by domestic producers in order to lobby bureaucrats for protectionism so that they can limit competition from abraod. Everyone who has any common sense knows that if a dumper squandered a tremndous amount of resources (through opportunity costs) in establishing a monopoly [if it could ever be accomplished], competition would re-emerge just as soon as economic profits were to be had again. The trend for a market to move to an equalibrium of zero economic profits will always exist. The monopolist would have to maintain prices at a level that produces zero economic profits for them to remain a monopoly.

In other words, profit-seeking will always create scenarios where monopolies will not last [unless, of course, government establishes the monopoly through policy or the monopoly is a true natural monopoly].

Challenge to protectionists on the board: please provide one instance where a 'dumping' country/company has ever maintained a corner on a market for an item.

[LowCountryJoe]

Reagan was still a politician who had constituients to appease. As for free trade being international corporate socialism? Free trade seems more like capitalism to me -- voluntary exchange of goods/services between two or more parties so that each party walks away from the exchange in better shape than they were before the transaction. Tell me where I am wrong.

But I am more concerned with FReepers here who think that government-managed trade with all the instituted restrictions & barriers and economic liberties lost, isn't socialism. It's worse than socialism! It's central-planning, top-down, command-style economics that does not coincide with economic liberty. Are you one of those people who like government-managed trade where asshat politician select whiners winners and losers?

[familyop]

"Free trade has lead to the so called service economy which will never create wealth...only bubbles which burst...this latest one is the worst one because of those little H bombs floating around our economy.... called credit default swaps/derivatives courtesy of Wall Street. we need a 4 trillion taxpayer financed bad bank for these gems- a ‘gift’ from Wall Street to Main Street."

Worldwide, nearly $600 trillion dollars in derivatives were written without assets. On US schemes to bail some of the perpetrating groups out, one example would be $152 billion from the US Government to AIG in London.

This time, there won't be a case of a few Americans being only so sad. Most will be very angry. Maybe that's why the RNC picked an anti-Second-Amendment Chairman a few days ago.

[nyconse]

Dumping is addressed in the WTO...so you are incorrect...Japan has long used dumping in order to drive the big three out of business...success soon I think.

dumping

Definition

Exporting goods at prices lower than the home-market prices. In price-to-price dumping, the exporter uses higher home-prices to supplement the reduced revenue from lower export prices. In price-cost dumping, the exporter is subsidized by the local government with duty drawbacks, cash incentives, etc. Dumping is legal under GATT (now WTO) rules unless its injurious effect on the importing country’s producers can be established. If injury is established, GATT rules allow imposition of anti-dumping duty equal to the difference between the exporter’s home-market price and the importer’s FOB price.

[cripplecreek]

voluntary exchange of goods/services between two or more parties

Never mind the threats of lawsuits and sanctions if we don't buy from someone else.

[nyconse]

Yeah, then we will have to use pitch forks I guess. LOL

[nyconse]

We already have government managed trade, and it’s not working for the American people or American industries.

[hedgetrimmer]

Whoa Dude! Free Trade <> Income Tax.

Yes it does.

Another difference between Free-Trade and Protection is that Free-Trade lowers revenues and increases taxes, and Protection raises revenues by decreasing taxes. And that's some difference.
--Oswald F. Schuette