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Smoot-Hawley Tariff Act

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Representative W.C. Hawley, and Senator Reed Smoot shake hands in agreement on new tariff bill
Representative W.C. Hawley, and Senator Reed Smoot shake hands in agreement on new tariff bill

The Hawley-Smoot or Smoot-Hawley Tariff Act raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the opinion of many economists, protracted or even initiated the Great Depression. U.S. President Herbert Hoover signed the act into law on June 17, 1930.

Contents

Congressional sponsors

The act was pioneered by Senator Reed Smoot, a Republican from Utah, and Representative Willis C. Hawley, a Republican from Oregon. President Herbert Hoover had asked Congress for a downward revision in rates, but Congress raised rates instead. While many economists urged a veto, Hoover thought he could finesse the law through the U. S. Tariff Commission, and signed the bill. Hoover had, during the 1928 election campaign, pledged to help beleaguered farmers by, among other things, raising tariff levels on agricultural products. Opponents of the measure organized a petition signed by 1,000 economists who expressed concern about anticipated tariff reprisals from other countries.

Amount of the tariff

According to Richard M. Salsman, The Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the US", quadrupling previous tariff rates.Salsman, Richard M. "The Cause and Consequences of the Great Depression, Part 2: Hoover's Progressive Assault on Business" in The Intellectual Activist, ISSN 0730-2355, July, 2004, p. 15.

Although the tariff act was passed after the stock-market Crash of 1929, many economic historians consider it a factor in deepening the Great Depression. Unemployment was at a troublesome 9% in 1930, when the Smoot-Hawley tariff was passed, but it jumped to 16% unemployment the next year and 25% unemployment two years after that. The annual rate of unemployment in the United States never got back down to the 9% level again during the entire decade of the 1930s.

Some economists also view the stock-market crash as being a pre-emptive revaluation of stocks based on the news that the tariff act would most likely pass into law. On October 23, 1929 (according to the New York Times reporting on October 24th) the anti-tariff coalition broke apart. The Dow Jones Industrial Average dropped by 21 points, or over 5%, during the last hour on the 23rd. On the 25th, the New York Times reported that on the 24th the anti-tariff forces had suffered another setback and casein tariffs in the draft Smoot-Hawley bill were raised by 87%. The 24th was "Black Thursday" as the Dow continued to fall. However, news commentators at that time did not make the causal connection between the tariff news and the market's fall.

As countries resorted to protectionism, the general amount of international trade radically decreased, causing the world economy to slow.

In part as a result of the Hawley-Smoot Tariff and other countries' responses to it, the post-World War II world saw a push towards multilateral trading agreements that would prevent a similar situation from unfolding. This led in part to the Bretton Woods Agreement in 1944 and the General Agreement on Tariffs and Trade (GATT) in the 1950s.

There is still some historical debate as to whether the tariff was directly harmful to the US domestic economy or not. A revenue-generating tariff can be beneficial to an individual domestic economy, if other countries do not retaliate with tariffs of their own. However, in classical and neoclassical economic theory, a tariff above a certain level will in and of itself lower revenue, harm trade, and reduce the general welfare.

Opponents of Smoot-Hawley argue that it angered major trading partners who retaliated. Canada for example not only raised its tariffs but forged closer economic links with the British Commonwealth, and US-Canada trade plunged. France and Britain protested and developed new trade avenues. Germany developed a system of autarky. Imports plunged two-thirds from $4.4 billion (1929) to $1.5 billion (1933), exports fell from $5.4 billion to $2.1 billion, in both cases far more than the 50% fall in GDP. The tremendous drop in foreign trade was a stunning shock to the proponents of Smoot-Hawley, and effectively destroyed advocacy of high tariffs in the US.

Causes

Recently, it has been argued that Smoot-Hawley was an attempt by the Repubican party to deal with the problem of overcapacity that plagued the U.S. economy in the 1910's and 1920's, itself the result of extremely-high throughput, continuous-flow mass production. Rated capacity had increased tremendously; actual output, income and expenditure had not. Under the watchful eye of Senator Reed Smoot of Utah, the party drafted the Fordney-McCumber tariff act in 1921 with an eye to increasing domestic firms' market share. Weakening labor markets in 1927 and 1928 prompted Smoot to propose yet another round of tariff hikes. In his memoirs, Smoot made it clear: "the world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war"(Merrill, 1990).

Economic impact

Economic historians have made different estimates of the impact of this tariff on world trade; they all conclude the impact was negative. Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and nontariff trade barriers on worldwide trade over the period 1929 to 1932. He included not just Hawley-Smoot but the tariff increases in other countries as well. He concluded that real world trade contracted approximately 14% because of declining GNP in each country; 8% as a result of increases in tariff rates; 5% owing to deflation-induced tariff increases; and a further 6% because of the imposition of nontariff barriers.

The Smoot-Hawley Tariff in popular culture

In comedy, mention of the Tariff is occasionally made when reference to a notably obscure event from American history is needed. Examples of this have occurred in the following:

Footnotes

See also

Other articles

External links

Bibliography

 

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