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BAD BUSINESS

Smoot-Hawley

1930

Few bits of legislation have managed to do the damage that the Smoot-Hawley Tariff Act, passed in 1930, did to the American and world economy. The bill was introduced by the chair of the House Ways and Means Committee, Willis Hawley, and the chair of the Senate Finance Committee, Reed Smoot. The preceding fall, the stock market had crashed, and this bill was an attempt to revive the American economy. To do this, the act created a stiff tariff on more than 20,000 foreign imports. The plan was to suck money from Europe in the form of tariffs and to make European goods more expensive so that American-made items would have a distinct sales advantage. The bill easily passed a panicky Congress and doubled the effective duties on many manufactured and agricultural products.

The real effect of Smoot-Hawley was almost exactly the opposite of its intent. The European nations, seeing their products being virtually locked out of the U.S. market, passed their own protective tariff bills in retaliation. This meant that most American goods up to doubled in price all over Europe. By 1932, the trade war Smoot-Hawley had started was in full swing.

In 1929, the United States had exported about $4.5 million worth of goods to Europe. A million dollars went pretty far in 1930, when a loaf of bread cost $0.09. By 1931, all U.S. exports there totaled only $1.5 million. Two-thirds of all imports from the United States had been blocked out by the protective tariffs passed between 1930 and 1932. Imports to the States diminished just as quickly, going from $5.5 million to just over $2 million by 1932.

But no one bought new American goods from new American factories to replace the more expensive European imports that the Smoot-Hawley bill blocked out. Had they been able to do so, it might have worked. The reason they could not was that many of the consumers no longer had the money to buy much of anything. This was because of the millions of jobs lost as factories closed because they no longer could export their products to Europe. The unemployed were unable to buy American-made goods, much less more. Job losses made the Depression much worse. Not only were the jobs at the exporters lost, but many American jobs were gone as well. The American agricultural sector also largely depended on exports, and so protectionism made it impossible for farmers to sell their crops. This forced down the price paid for agricultural products. Lower prices put many farmers and farm workers out of work and cost thousands of families their farms.

When a quarter of the buyers of your product suddenly have no money, then your sales are down 25 percent. So you have to lay off some of your workers, cut wages, or eliminate benefits to enable your business to survive. But increasing the number of employed and paying workers less mean that sales for everyone are down again. The unemployed or financially strapped workers have less money to spend. As they continue to spend less, domestic sales continue to plummet and more workers lose their jobs. This cycle of unemployment creating more unemployment, which Smoot-Hawley reinforced, continued until World War II and wartime spending ended it.

The Smoot-Hawley Act had exactly the opposite effect of what was intended. Rather than helping to end a depression, which was started mostly by bad monetary policies, the tariffs it created made the financial situation much worse. Those tariffs caused a trade war that guaranteed that the 1930s saw not just another recession, but the Great Depression.

Reed Smoot and Willis Hawley were soundly defeated in the 1932 elections. Those workers whose jobs they had destroyed voted them out. By 1944, most nations had done away with the worst of the tariffs the bill had created and the postwar recovery became the greatest expansion of wealth in recorded history. It is only in the last few years that a return to protective tariffs for some businesses have reappeared. They were a mistake that changed the world and made a bad economic situation terrible. Let us hope today’s leaders have learned from history.

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