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]

Good night...nice discussion.

[nyconse]

I would not disagree... I think the condition of your economy dictates the solution...in times of inflation, tax cuts and balanced budgets are enormously helpful. In times of deflation, you need to spend in order to re-inflate the economy. Roosevelt did this except for his attempt to balance the budget which drove unemployment higher. Sweden which followed a pure Keynesian approach was the first to climb out of the great depression. This approach would have been a disaster in the early 80’s when Reagan basically saved the economy with supply side economic principles.

[Will88]

Trade is often used as a reward for those countries we like or want something from...a tool for foreign policy with no consideration of the effect on the economy or American business.

Ain't the the truth. I've heard it said that our trade policy is our number one foreign aid program. Lot's of truth to that, and it accounts for some significant part of our ever growing trade deficit, and loss of industries.

[nyconse]

Agreed...I wish Obamam would support US business, but I fear like all the modern presidents despite his big trade talk that won the Mid West, he is a globalist.

[nyconse]

Do you know how many times this clip was played in Ohio?

[nyconse]

The rise of fascism caused a global war...we almost became fascist in this country courtesy of our very rich financiers like JP Morgan, Maguire and possibly Prescott Bush...did you know they tried to overthrow the government (Roosevelt) and install a dictator? Read up on General Butler who basically was offered the position of dictator in chief and instead turned the conspirators in to Congress. He was a Marine...you can always count on Marines...Semper Fi and good night.

http://coat.ncf.ca/our_magazine/links/53/dupont-by_colby.html

[hedgetrimmer]

There’s that ‘consumer’ thing being more important than that citizen thing.

If you respect the Constitution then you’ll respect this:
Article 1 section 8
To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;

The preamble is a preamble. The blessings of liberty doesn’t mean anarchy, which is what you say you want. Liberty means responsibility, after all.

[Mase]

My comment was for those who think McCain is stupid. He was an abysmal candidate, and a woeful Republican, but he isn't stupid. The leftists said Bush was an idiot and claimed the only reason he got in to Yale and Harvard was because of family connections. Getting in and graduating are two different things. McCain's pedigree may have helped him into the Naval Academy but the fact that he graduated from there, like Bush from Yale and Harvard, should be the first clue that he isn't stupid. At least he told the truth. Obama, instead, promises he's going to create 4 million jobs, or was it 5 million jobs? Has he changed it to 2 million now? I lose track. But McCain is stupid......

[Mase]

There’s that citizen vs. consumer thing again. Can you name a living American who isn’t also a consumer?

[Mr. Silverback]

Excellent post!

[familyop]

I agree very much on the failures of most government spending, including much of the spending during Roosevelt's terms (although it would be sardonically enjoyable to cut a lot of Teddy's trees down). Have a look at how much spending is done now in administrations of both political parties, and especially, where it goes. That's gone from bad to far worse. Let's compare two evils: "forty acres and a mule" to family-busting. Compromises between the political parties do not work. The current trend of socialist and libertine gradualism toward pushing conservatives out of the Republican Party while inviting liberals into the administration of it will be the end of the Party. ...much like the '20s but worse.

Stopping social/welfare spending would be better, but immoral/nonworking methods of competition (corporate-government alliances pushing selective enforcements against smaller businesses) would have to be stopped, big federal law enforcement being the only working method of shutting the local mobs down so far.

[Mr. Silverback]

There was no demand for Communist Chinese products 30 years ago....no one was going around “oohh...I got to have that Chinese dog food”

But the were saying, "I have to have tha new Japanese car" and people were freaking out and calling for tariff hikes then, too.

[Mr. Silverback]

With all due respect to Michael Reagan, he’s forgetting the role of Harley’s successful quality initiatives here. IIRC, a big part of the reason the riceburners were whupping up on Harley was that they were so poorly made that the dealerships had to put cardboard under brand new bikes because they leaked oil already.

[familyop]

"Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938,"

I agree. And although the indicators did go up between 1934 and 1938 (Smoot-Hawley?), they did fall after 1938. Making steep spending cuts is possible (real cuts, not only smaller increases, as were done during the Reagan years), but those who administer both political parties would rather look at constituent money and noise than votes.

[familyop]

...indicators did physically fall *during* 1938. ...my mistake.

[Mr. Silverback]

Alas, the federal gov’t is tasked with regulating trade, not you. Article 1, section 7.

Yes, but that doesn't mean that the government should not do so in a way that is as consistent with individual freedom of choice as possible. The government's in charge of roads, too, but that doesn't mean they get to hand me a road map and tell me where to drive each day.

[pissant]

They should do so in a way that protects our national security, first and foremost.

[pissant]

Bump

[familyop]

"Bump"

...for the cited table in comment #232? You're most welcome. Do the browser "View," "Page Source," or whatever, save (starting with "Compensation from"), and use it whenever necessary!

[familyop]

...will see if I can find some other economic indicators for the period. Those are better, because they tend to rise before unemployment goes down.