Tariffs and the Great DepressionBy: Lynn Hamilton
Wednesday, March 1, 2017
Since the Great Depression, tariffs and trade policies have not been major issues between Democrats and Republicans or Conservatives and Liberals. All Presidential candidates (until the election of 2016) have either favored stability or a more open international trade policy. During peace time, we had Protectionist Tariffs (taxes on imports), such as the Tariff of 1828, and we occasionally had low tariffs to pay for Federal expenditures. The peace-time income tax did not come until 1913.
Economists have debated for years about what caused the Great Depression of the 1930s. It seems clear that the Depression was so terrible that there was not just one cause but many. A severely-restrictive monetary policy, budget cuts, and tax increases certainly played major roles. There is, however, considerable evidence that Protectionist Tariffs started the Depression. While the Smoot-Hawley Protection Bill did not take effect until June of 1930, the legislative progress of the bill took place in the fall of 1929 and is viewed as a catalyst of the stock market crash. The Bill was initially designed to help farmers who had largely not participated in the boom of the 1920s. Consensus was that the bill had little chance of being enacted. Senator Smoot and Congressman Hawley, however, were wily politicians. They added radically higher tariffs on a wide range of other goods to their bill in order to get votes from others in Congress. As their bill got more toxic, it got more Congressional support.
It had one problem though. New President Herbert Hoover had considerable experience in international trade, both as a businessman and Commerce Secretary for Presidents Harding and Coolidge. Roughly 1,038 U.S. economists had sent him a petition asking him not to sign Smoot-Hawley. Henry Ford called the bill “economic stupidity.” JPMorgan CEO Thomas Lamont referred to it as “asinine.” It was widely thought that Hoover would veto Smoot-Hawley and that Congress clearly would not have the “super majority” needed to override his veto. Hoover announced, however, that while he did not really endorse the Bill, he would sign it if passed. The major Fall of 1929 crash began that month.
Smoot-Hawley raised taxes on imports by 50% on an already-high level of 25%. Our trading partners soon responded in kind. Some economists have called this the “largest peace-time tax increase in American history.”
Sources: Jude Wanniski, Douglas Irwin, George Mellon
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