The Impact of the Smoot-Hawley Tariff on the Great Depression
Quotes taken from the essay titled The Smoot-Hawley Tariff in the Encyclopedia of the Economic History Association written by Professor Anthony O’Brien of Lehigh University.
“The Smoot Hawley tariff grew out of the campaign promises of Herbert Hoover during the 1928 presidential election. Hoover, the Republican candidate, had pledged to help farmers by raising tariffs on imports of farm products. Although the 1920s were generally a period of prosperity in the United States, this was not true of agriculture; average farm incomes actually declined between 1920 and 1929.”
“In a longer perspective, the Republican Party had been in favor of a protective tariff since its founding in the 1850s. The party drew significant support from manufacturing interests in the Midwest and Northeast that believe they’ve benefited from high tariff barriers against foreign imports. Although the free trade agreements dear to most economists were espoused by a few American politicians during the 1920s, the Democratic Party was generally critical of high tariffs.”
Dr. O’Brien then raises the question: what was the impact of the tariff on the Great Depression?
“The best estimates are that the multiplier is roughly 2. In that case, real GDP would have declined by about 3.4% between 1929 and 1931 as a result of the decline in real exports. Real GDP actually declined by about 16.5% between 1929 and 1931, so the decline in real exports can account for only about 21% of the total decline in real GDP.”
A study by the U.S. Tariff Commission compared the tariff rates of Smoot-Hawley of 1930 to the tariff rates of Fordney-McCumber of 1922 and concluded, “Smoot-Hawley raised average tariff rates by about 2 1/2 percentage points from the already high rates prevailing under the Fordney-McCumber tariff of 1922.”
At this point, it is important to note that the tariff increases passed in 1922 were far greater than the 1930 increases of Smoot-Hawley. If the Smoot-Hawley tariff was a major cause of the Great Depression, then why did the even larger tariff increases of 1922 not cause a depression at that time? The huge tariff increases of 1922 did not cause a depression or even a recession. Therefore, one must be very skeptical about laying the Great Depression at the feet of Smoot-Hawley.
“If there was retaliation for Smoot-Hawley, was this enough to have made the tariff a significant contributor to the severity of the Great Depression? Most economists are skeptical because foreign trade made up a small part of the U.S. economy in 1929 and the magnitude of the decline in GDP between 1929 and 1933 was so large.” It is here that Dr. O’Brien points out that only in the case of Canada is there any clear evidence of retaliation. Much of the belief in widespread retaliation originates from a book in 1934 by Joseph Jones.
Professor O’Brien goes on to ask the question “But what is the effect of a tariff on the overall level of employment and production in an economy?”
“Although the popular view is that tariffs create new jobs, or preserve old ones, most economists believe that the effect of tariffs on the total number of jobs available in an economy as temporary. The overall level of employment in an economy is determined by such factors as the size of the population, the fraction of the population that is of working age, and the choices individuals make with respect to engaging in paid labor as opposed to unpaid labor or leisure. These factors are generally not affected by tariffs.”
“The usual analysis of the effects of tariffs on total production are similar. The level of total production in an economy is determined by such variables as the capital stock, the population and the state of technology, which tariffs do not affect.”
The best academic minds and the research they have produced point to the fact that the Smoot-Hawley tariffs had a very small impact on making the Great Depression worse. By far, the most damaging aspect of the Great Depression was the 35% decline in the money supply. Added to that, at the same time about one third of all the banks in the United States disappeared. Remember, that during that time period, there was no FDIC insurance to provide a government reimbursement to the average American for money lost in a bank failure. Back then if your bank failed then your money was just gone.
The myths about Smoot-Hawley, rather than the most up-to-date research facts, are given continuing credence by such sites as Wikipedia. The information about Smoot-Hawley on many Web sites ignores the academic research and findings of at least the past 40 years, some of which has been presented here.
Will Bahr is an economics professor at Conestoga College.