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.

[Uncle Miltie]

"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?"

It doesn't "benefit" us for anyone to have trade restrctions. We are harmed by not having that market available to us. But harmed worse are the Korean consumers forced to pay premiums since the U.S. is disallowed to compete there. Not nice for us, really horrible for them.

If that is what they vote for, that is what they get. We got Obama. Electorates are not always wise.

[familyop]

"Man, the great depression did not end until 1943 and only because of the war. What history books are you reading?"

I'm not reading that romanesque crap coming out of politics now. And unlike those who digest the propaganda, I did read American history books on the topic. See comment #140. All economic indicators were up in 1934 and thereafter.

[Uncle Miltie]

"On dumping, remember cheap foreign cars and the tariff on them, all it did was make US auto manufactures more money and stupid."

Bzactly.

We thank you for your support.

[Mase]

There’s one of your many problems, hedge. You think all transactions are win/lose and, therefore, economics is a zero sum game. The fact that free individuals engage in transactions that are mutually beneficial really bothers you. The question is why? Do you, like Obama, believe you know what’s best for us and without your (and government) direction (read: command) we’ll be victimized by the man? Where did you learn to be such a good little Marxist?

[LowCountryJoe]

You're an anarchist-capitalist who argues Constitutional government is bad.

Wrong! I am a minarchist who argues that the spirit of the U.S. Constitution, as laid out in its Preamble, is completely subverted by people who would debate that economic liberty is bad when consumers have the liberty to purchase goods made from abroad. The Preamble is posted for your reading pleasure, below:

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

Apparently securing the Blessings of Liberty is only good as long as it's nationalistically approved by the resident champions of more Leviathan government -- the true patriots! [/barf]

[Uncle Miltie]

"They knew what they were doing to the economy...they were betting against this country"

Even accepting your premise for argument's sake, I have no idea how that impacts international trade. WTF?

[Uncle Miltie]

"Free trade has lead to the so called service economy"

In which I work shipping billions / trillions of software around the globe, thank you very much.

[Mase]

Then I remembered he graduated 3 from the bottom in his Naval Academy Class.

Because only stupid people tell the truth?

[aruanan]

"Free trade has lead to the so called service economy"

Apparently it's "lead" to egregious spelling also.

[listenhillary]

Unemployment figures
1936
17.0

1937
14.3

1938
19.0

1939
17.2

1940
14.6

[LowCountryJoe]

You're an anarchist-capitalist who argues Constitutional government is bad.

Forgot to ask, after correcting your mischaracterization of me, are you going to argue that we have a Constitutionally-followed government at this point?

[Uncle Miltie]

Do that every day.

I remember when my family couldn’t really afford to buy me new shoes. They cost $35. My feet hurt. $35 was my mom’s food allowance for 2 weeks.

Now, I have shoes coming out of my ears. They’re still $35. The difference is (shockingly bad monetary policy and dollar degradation aside), it took my dad about 5 hours of work to earn me a pair of shoes. Now, it takes me about 20 minutes of work to earn a pair of shoes.

Comparative Advantage works! Let the Chinese make shoes. I’ll make software. Damned if I want my daughter working in a shoe plant.

[familyop]

"You think all transactions are win/lose and, therefore, economics is a zero sum game. The fact that free individuals engage in transactions that are mutually beneficial really bothers you.'

Let's see. We once made some products that are now made my anti-American foreign nations and imported to us. The money for those products goes to the foreign nations, with a very few anti-American American administrations bribed for the exchange. Then the administrators pay for their daughters' indoctrinations into Marxism.

That doesn't look like a good, conservative American deal to me.

[LowCountryJoe]

Properly regulated trade will help all nations...

Do you have split personalities? You have already made the claim that other nations are our enemies and that we shouldn't be helping them. Maybe I am putting words in your mouth but it does appear like you just got done writing some such thing a few posts above the one that I am replying to.

[nyconse]

You want to see the results of job losses in Steel...take a ride down to Buffalo New York, Warren Ohio, Gary Indiana to name a few...you know how many billions were lost when cheap steel was dumped on the American market? Many of these areas never recovered. I think the figure below says it all: How many billions were lost?

Growth continued at a rapid rate but other industries grew even faster, so that by 1967, as the downward spiral began, steel accounted for 4.4% of manufacturing employment and 4.9% of manufacturing output. By 2001 steel accounted for only 0.8% of manufacturing employment and 0.8% of manufacturing output.

[investigateworld]

Sounds like he wants those jobs to stay out of the country...

Who knows, the man is stupid - and as predicted here in the FReepdom ran a stupid campaign or took a dive to help his friends.

And yes, I do blame the Republican Party's loss last November on their free trade - screw the public attitude.

[nyconse]

How about the garment industry. Illegal dumping by China which was ignored by Clinton drove the garment industry out of the South or we could talk about electronics....so many industries so little time.

[LowCountryJoe]

BUMP!

[RC one]

I agree with everything except the part where you suggest that trade has nothing to do with this mess. Exportation of jobs and importation of foreign labor has contributed greatly to the mess we find ourselves in. True, some have benefitted greatly by this scenario but the majority of us have been steamrolled by free trade policies. It’s the same old story, the rich got richer and the poor got poorer. This mess is all about trade policies.

[Uncle Miltie]

Love your summary of the monetary situation in the GD.

"the more the US opens its markets and pretends free trade really does exist when it usually doesn't, the more harm is done to the US economy"

I don't see the harm. Excepting the current debacle cause by loose money and bad mortgages (see my epic post above regarding the non-trade causes), we have had full employment, rising living standards, lengthening life spans, lowered infant mortality, growing productivity, etc. since about 1980. I'm in favor of all that. It was coincident (and I'll argue somewhat caused by) Free Trade. I don't want to go back to the bad old days of Jimmy Carter. Life sucked then.

I agree people put too much emphasis on Smoot Hawley. It contributed to the lengthening of the GD, in my (and many other economist's) opinion. Far worse were the Keynesian and semi-Marxist policies of FDR. Friedman blames monetary policy, which I'm sure had its disastrous effect. In comparison, I agree with you that Smoot Hawley was small.

But a small bad effect should not be the cause of euphoria for reinstituting a bad idea, a la the poster.