I want to present the most balanced and the most professional of views on the impact of the Smoot-Hawley Tariff on the Great Depression of the 1930s. To do that I have turned to the Economic History Association’s Encyclopedia. The Economic History Association’s Encyclopedia is available online at EH.Net. Here is the background of the Economic History Association’s encyclopedia quoted from the home page of EH.Net.

“In 2003 the Economic History Association became EH.Net’s owner. Additional support comes from the Business History Conference, the Cliometric Society, the Economic History Society (UK), and the History of Economics Society. In addition, EH.Net hosts discussion lists and websites for several other scholarly organizations.”

The point I would like to make here is that the information that follows is from the Encyclopedia of the Economic History Association. The essays found in the Encyclopedia of the Economic History Association, which are supported by the other academic organizations, represent the most current and up-to-date research of the professional and academic community and therefore are highly regarded. If an essay were not supported by the latest professional and academic research then that essay would be replaced.

The following quotes regarding the Smoot-Hawley tariff and the Great Depression are from the EH.Net Encyclopedia essay titled An Overview of the Great Depression written by Professor Randall Parker.

“In reviewing the economic history of the Depression above, it was mentioned that the supply of money fell by 35%, prices dropped by about 33%, and one third of all banks vanished. Milton Friedman [Nobel prize-winning economist] and Anna Schwartz, in their 1963 book A Monetary History of the United States, 1867-1960, call this massive drop in the supply of money “the great contraction.”

“Friedman and Schwartz (1963) discuss and painstakingly document the synchronous movements of the real economy with the disruptions that occurred in the financial sector. They point out that the series of bank failures that occurred beginning in October 1930 worsen the economic conditions in two ways. First, bank shareholder wealth was reduced as banks failed. Second, and most importantly, the bank failures were exogenous shocks that led to the drastic decline in the money supply. The persistent deflation of the 1930s follows directly from this ‘great contraction.’”

Criticisms of Fed policy

“However, this raises an important question: Where was the Federal Reserve while the money supply and the financial system were collapsing? If the Federal Reserve was created in 1913 primarily to be the “lender of last resort” for the troubled financial institutions, it was failing miserably. Friedman and Schwartz pin the blame squarely on the Federal Reserve and the failure of monetary policy to offset the contractions in the money supply. The money multiplier continued on its downward path, the monetary base, rather than being aggressively increased, simply progressed slightly upwards on a gently positive sloping time path. As banks were failing in waves, was a Federal Reserve attempting to contain the panics by aggressively lending to banks scrambling for liquidity? The unfortunate answer is “no.” When the panics were occurring, was their discussion of suspending deposit convertibility or suspension all the gold standard, both of which had been successfully employed in the past? Again the unfortunate answer is “no.” Did the Federal Reserve consider the fact that it had an abundant supply of free gold, and therefore that monetary expansion was feasible? Once again the unfortunate answer is “no.” The argument can be summarized by the following quotation:”

At all times throughout the 1929-33 contraction, alternative policies were available to the System by which it could have kept the stock of money from falling, and indeed could have increased it at almost any desired rate. Those policies did not involve radical innovations. They involve measures of a kind the [Federal Reserve] System had taken in earlier years, of the kind explicitly contemplated by the founders of the System to meet precisely the kind of banking crisis that developed in late 1930s and persisted thereafter. They involved measures that were actually proposed and very likely would have been adopted under a slightly different bureaucratic structure or distribution of power, or even if the men in power had had somewhat different personalities. Until like 1931 — and we believe not even then — the alternative policies involved no conflict with the maintenance of the gold standard. Until 1931, the problem that recurrently troubled the System was how to keep the gold inflows under control, not the reverse. (Friedman and Schwartz, 1963)

“The inescapable conclusion is that it was a failure of the policies of the Federal Reserve System in responding to the crisis of the time that made the depression as bad as it was. If monetary policy had responded differently, the economic events of 1929-33 need not have been as they occurred. This assertion is supported by the results of Frackler and Parker (1994). Using counterfactual historical simulations, they show that if the Federal Reserve that kept the M1 money supply growing along its pre-October 1929 trend of 3.1% annually, most of the depression would have been averted. McCallum (1990) also reached similar conclusions employing a monetary base feedback policy in his counterfactual simulations.”

As Professor Parker points out in his conclusion, it was the lack of action by the Federal Reserve that was the #1 cause of the severity and length of the Great Depression.

Will Bahr is an economics professor at Conestoga College.

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