“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? The Hawley-Smoot Tariff Act…”
Many of us remember this classic scene from “Ferris Bueller's Day Off,” in which famed economist Ben Stein dryly explains this depression era legislation to a class of dim-witted high school students. Though it did make for a hilarious scene, the tariff bill he was talking about had a powerful effect on the world economy. So, what was this famous piece of legislation, and how did it alter the course of the Great Depression?
Globalism is certainly a hot topic now, but it’s really always been an issue as countries compete to sell goods worldwide. Protectionist policies place high tariffs on imported goods. This makes those goods less desirable in the country that imposed the import duties. This gives a competitive advantage to products made or grown domestically.
Take wheat, for example. China is one of the top wheat producers in the world. Let’s say that the Chinese government converts thousands of previously unused acres of land to wheat production. The increase in production causes the price of Chinese wheat to fall. Global trading partners start favoring wheat from China over domestic wheat, which is now more expensive.
Here at home, let’s say that American farmers are unable to lower their prices without taking a loss. Companies that use wheat in their products are going to buy Chinese wheat. So, they talk to their representatives in the federal government and say, “Hey, we elected you. Help us out. We can’t compete with this low priced Chinese wheat.”
If their representatives in congress want to please their constituents, then they’ll work to enact protectionist legislation which imposes import duties on imported goods. This makes the price of Chinese wheat higher here, and reduces foreign competition. Problem solved. Or, maybe not! There are a host of problems associated with this.
The U.S. Economy entered a depression in the fall of 1929. The world economy had been trending downwards for a while, but it was really the stock market crash of October 29th of 1929 which caused alarm to echo throughout the globe.
In the wake of World War I, a situation developed here in America that eventually led to the creation of the Tariff act of 1930. Food prices climbed as Europe recovered from the horrors of the first world war. In turn, this fed massive amounts of land speculation here at home.
American farmers took on large levels of debt to acquire more and more farmland to take advantage of the increased profit offered by selling various agricultural products. The situation in Europe stabilized, and food prices fell. This meant that farmers here in the US faced bankruptcy as they could no longer pay for the land they’d purchased based on these lower prices for exports.
The US had experimented successfully with imposing various trade barriers in the past, which appeared to have the effect of reducing foreign competition and boosting the price on imported goods. Protectionist Senators and representatives from nearly every state seemed to want to raise the price of nearly everything, not just agricultural imports, but other types of goods as well.
Enter Republican Representative Willis Hawley from Oregon and Senator Reed Smoot from Utah. Smoot had been lobbied by the sugar beet industry in Utah and wanted to protect them from foreign competition. He was also the Chair of the House Ways and Means Committee.
These gentlemen advanced their respective bills through the house and the senate. The stock market entered a roller coaster period as the bills were revised. The massive crash occurred several months before President Herbert Hoover signed the bill into law in June of 1930. The passage of the bill did little to help, as the market only continued to fall. Why?
Unfortunately, the sheer scale of tariffs imposed meant that the price of goods only got higher, right at a time when people were often jobless. This meant that the meager amount of money they had went even less far, thus contributing to an even worse economy.
The passage of the smoot-hawley tariff act plunged the country into a trade war, as other countries retaliated with a hostile trade policy of their own. Banks failed worldwide and international trade declined. Even our friendly neighbors to the north, Canada were furious with our decision, and retaliated with their own measures.
Economists, such as Douglas Irwin have long argued that the act was a failure, and succeeded only in making the depression worse. Though there were many hard years ahead, culminating in the terror of World War II. The strain placed on the economies foreign countries, including Germany may have given rise to the extremism found in figures such as Adolf Hitlor or Benito Mussolini.
President Franklin Roosevelt signed legislation called the “Reciprocal Trade Agreements Act,” which undid some of the damage done by Smoot Hawley, making the U.S. exports more attractive to other countries through lower tariffs..
The discussion over whether or not to enact protectionist policies didn’t end with the second world war. In the wake of the presidential election of 2016, President Trump made some waves from the White House as he withdrew from the trans pacific partnership and renegotiated NAFTA, the North American Free Trade Agreement..
There may not be just one answer to the question. It seems that tariffs can be a tool, but probably one that should be viewed as a scalpel, not a sledgehammer. No country is going to be happy about having tariffs imposed on them, so the effects on world trade need to be very carefully considered before imposing higher duties.
To say that our politicians are often reactionary and short sighted is an understatement. We need to be conscious that actions such as imposing tariffs often have wide ranging and unpredictable consequences.