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Thursday, April 26, 2012

Peddling Protectionism: Smoot-Hawley and the Great Depression

One of the more infamous pieces of legislation in American history is the Smoot-Hawley Tariff. Willis Hawley, a Republican member of the U.S. House from Oregon, promised the bill would create “a renewed era of prosperity.” Reed Smoot, a Republican senator from Utah, claimed, “[T]he Depression would have been worse without the higher tariff.” No doubt they believed that high tariffs were sound policy, but in this book economics professor Douglas A. Irwin examines the actual effects of their protectionist handiwork and shows that it was harmful.

A popular perception is that American producers agitated for protection from imports. Irwin’s review of the history shows that to be wrong. Although some farmers wanted higher tariffs, many others preferred price floors, subsidies, or lower tariffs on manufactured imports. Failing to enact those policies, Republican politicians (mostly from the Midwest) hatched the idea of raising tariffs on agricultural imports. The Republican Party speculated that farmers would vote for its candidates if it incorporated this strategy into the 1928 platform. Republicans retained their majorities in both houses of Congress that year, and Herbert Hoover became president. Their revision of the tariff code metastasized into the Smoot-Hawley Tariff Act of 1930.

Irwin’s longest chapter is the story of how Smoot-Hawley was made. Congress is predisposed to restrict trade because, he explains, “the benefits of a tariff are highly concentrated on a few producers who are strongly motivated to organize and defend that policy; whereas the costs of tariffs are spread widely among many consumers for whom it does not pay to organize any serious opposition.” Nearly all who testified on the bill before the House wanted higher tariffs.

Occasionally producers who imported their inputs clashed with domestic producers of those inputs. Cattlemen, for example, wanted higher tariffs on imported leather but manufacturers of footwear opposed them. “Such conflicts were usually resolved,” Irwin observes, “by offering higher tariffs to both sides.” Logrolling raged in the Senate. Smoot, for instance, “convinced nine senators to change their votes on the sugar tariff in a vote-trading deal in which greater protection would also be given to lumber, oil, cement, and glass.” Eighteen months after deliberations began, in June 1930, the House and Senate passed their reconciled version of the bill. President Hoover promptly signed it.

Another common idea is that the Smoot-Hawley tariffs were astronomical. Irwin shows this to be wrong, too. According to him, “[T]he best guess is that [Smoot-Hawley] probably raised the average tariff on dutiable imports by about 15–18 percent, an increase of about 6 percentage points.” Compared with other tariff bills Congress had passed, that wasn’t especially high. The Fordney-McCumber Tariff of 1922 had been much worse. Nor did Smoot-Hawley have a dramatic effect on imports. The tariff did cause imports to fall somewhat during the early 1930s, but the combination of price deflation and lower incomes as the Depression deepened contributed to this reduction in trade.

Irwin also dismisses the belief that Smoot-Hawley played a major role in bringing about the Great Depression. “The consensus among economic historians,” he reports, “is that monetary and financial factors were the dominant factors behind the Great Depression in the United States.” The tariff increases undoubtedly made matters marginally worse, but they were not causative.

What impact did Smoot-Hawley have, then? It led to trade retaliation by foreign governments—increases in their tariffs, which cut down U.S. exports. For example, Canada more than tripled its tariff on eggs, and egg exports from the United States fell drastically. Similarly, Spain placed a high tariff on American cars, and exports fell 94 percent. Smoot-Hawley was not, however, the only reason protectionist policies broke out around the world. Irwin maintains that Britain’s abandonment of the gold standard in 1931, which made its exports cheaper, induced other countries to impose protectionist measures. Irwin concludes with this assessment: “But although Smoot-Hawley was not entirely responsible for the massive outbreak of protectionism in the early 1930s, it certainly contributed to the climate in which such policies flourished.”

The ultimate irony of this is that the tariff bill could not possibly have accomplished its narrow objectives of helping American farmers. In 1930 America’s largest exports were cotton, wheat, and tobacco. Increasing import duties were sure to damage our larger export markets.

Most of the book is quite readable, although a few passages sound like an academic journal. It is also enlivened by 17 editorial cartoons from the era. Through Irwin’s account one learns a lot about this period, the grisly process of making legislation, and the consequences of interfering with trade.