Smoot-Hawley, 1930, what the tariff did and what it did not do

In the spring of 1930, more than a thousand American economists put their names to a petition. They came from the universities, from all over the country, and they did not agree about much else. But they agreed on this: the tariff bill moving through Congress was a mistake, it would raise the cost of living, it would hurt American exporters and farmers, and the President should veto it. The President read the petition, listened to his advisers, and signed the bill on June 17, 1930.

The bill was the Tariff Act of 1930, which everybody calls Smoot-Hawley after its two Republican sponsors, Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon. Few laws in American history have been so widely cited and so little understood. The left says it caused the Great Depression. Some on the right say it had nothing to do with it, or that it was a fine law that history unfairly maligned. Both are overreaching. The truth is more interesting, and a speaker who knows it will beat both camps in an argument.

How the bill got so big

Start with the politics, because they explain the result. Herbert Hoover campaigned in 1928 promising help for the farm economy. The farm sector had been in trouble through the 1920s, and Republicans pledged tariff revision aimed mainly at agriculture. The existing tariff was the Fordney-McCumber law of 1922. Hoover called Congress into special session in 1929 to take up farm relief and a limited tariff revision.

Here is what happened, and it is a lesson in how Congress works. Once the tariff schedule is open, every industry wants in. A farmer's senator asks for protection on his crop; a manufacturer's representative asks for protection on his product; and each votes for the others' requests in return. Political scientists call it log-rolling. By the time the bill was done, it covered thousands of items across agriculture and manufacturing. The narrow farm bill had become a sprawling schedule that raised duties on a huge range of goods.

That mechanism is the first thing to understand, and I want to hang a flag on it: whatever you think of tariffs, setting hundreds of rates one by one in a legislature is a recipe for the loudest lobbyist winning. Remember that when we come to 1934.

The sequence: the crash comes first

Now the chronology, because it matters. The stock market crashed in October 1929, in the days we know as Black Thursday and Black Tuesday, October 24 and 29. That was months before the tariff became law. The slide in output, income and employment had begun, and by the time Hoover signed the bill in June 1930 the country was already in a recession. Whatever caused the first leg of the downturn, Smoot-Hawley did not. This is a point that the history books sometimes blur, and it is worth being exact about.

What the tariff could have done was make a bad situation worse, and spread it. Which brings us to retaliation.

How a duty works at the checkout

The word "duty" hides some arithmetic worth seeing. There are two kinds. An ad valorem duty is a percentage of the price. A specific duty is a fixed amount per unit. Take a hypothetical imported good priced at $10 at the dock. A 40 percent ad valorem duty makes it $14. Raise the rate to 50 percent and it is $15, a jump of $1 on $14, or about 7 percent at the register. A bill can raise a rate by ten points and the shopper sees a smaller step, but multiply that across thousands of goods and a household feels it.

Now the subtle part, and it mattered in 1930. A specific duty of, say, 10 cents on an item priced at $1.00 is a 10 percent tax. When the Depression pushed prices down and the same item sold for 50 cents, that same 10-cent duty became 20 percent of the price, without Congress changing a word. Falling prices quietly raised the real burden of every specific duty on the books. That is the reverse image of the inflation story in Inflation is the one tax that never needs a vote in Congress: deflation, too, can turn a tax into something bigger than its drafters meant.

The retaliation

American tariffs are other countries' export problems, and other governments do not sit still. Canada, then one of America's best customers, raised its own tariffs on American goods in 1930, with the new Canadian government under R. B. Bennett going further after the July election. Other trading partners, including some in Europe, adjusted their duties and quotas against American goods, and some openly cited the American law. A trade war, in the sense of tit-for-tat protection, spread through the early 1930s.

The result: world trade collapsed. By 1933, trade in terms of dollar value had fallen by roughly two-thirds from its 1929 level. Now, be careful. Much of that fall in dollar value was because prices themselves were falling during the deflation of those years, so the physical volume of trade fell by less. But it did fall, and the tariff walls were part of the reason, joined by a world in which money, credit and demand were all shrinking.

American exports fell sharply too, which hit farmers especially. Cotton, wheat and tobacco growers, the people the 1928 promises were supposed to help, lost foreign markets they depended on. The great irony of the 1930 law is that a bill sold as relief for agriculture helped close the foreign doors through which agriculture sold.

What did cause the Depression?

An honest account has to leave the tariff in its proper place, and that place is smaller than the slogans say. Consider the size of the thing: American exports were roughly one dollar in twenty of national output in the late 1920s. A tariff-driven drop in trade can hurt, but it cannot by itself explain an economy shrinking by a quarter or more. The leading explanations point elsewhere.

1. The stock market crash and the collapse of confidence. Wealth vanished and consumers and businesses pulled back.
2. The banking panics. Waves of bank failures from 1930 through early 1933 wiped out savings and froze credit. Depositors had no federal insurance; that came only with the Banking Act of 1933 and the creation of the FDIC. Roosevelt closed the banks for a national holiday in March 1933.
3. The monetary collapse. In their 1963 A Monetary History of the United States, Milton Friedman and Anna Schwartz argued that the Federal Reserve let the money supply shrink by about a third between 1929 and 1933, turning a recession into a catastrophe. You can see how the central bank is supposed to work in The Federal Reserve in plain English and the levers it really holds.
4. The gold standard. Countries tied to gold exported deflation to one another and were forced to tighten when they should have eased. Those that left gold earlier recovered earlier.
5. Trade barriers. Smoot-Hawley and the retaliation belong on this list, as an aggravating factor, not the trigger.

The Dartmouth economist Douglas Irwin, who has written the most careful modern book on the subject, Peddling Protectionism, concludes that the tariff was a minor contributor to the American downturn, though it did harm particular industries and the international order. That is the best reading of the evidence I know. It is neither a vindication nor a condemnation. It is a verdict on size.

The timeline in one place

1. 1922: The Fordney-McCumber Tariff raises duties after the First World War.
2. November 1928: Hoover wins the presidency promising farm relief and limited tariff revision.
3. April 1929: Hoover calls Congress into special session.
4. October 1929: The stock market crashes.
5. June 17, 1930: Hoover signs the Tariff Act of 1930.
6. December 1930: The Bank of United States in New York fails, one of the largest bank failures to that date, an early sign of the banking trouble to come.
7. September 1931: Britain leaves the gold standard.
8. 1932: Congress passes a large tax increase in the Revenue Act, in the middle of a depression, and Hoover signs it. Both Smoot and Hawley leave Congress that year, Smoot beaten in November and Hawley beaten in his own party's primary.
9. March 1933: Roosevelt takes office and declares a banking holiday.
10. June 1934: The Reciprocal Trade Agreements Act becomes law.

Item 8 is worth a second look. A conservative should note that the Hoover administration and Congress answered a falling economy by raising tariffs and then raising taxes, two moves that made it harder for families and firms to earn and spend. The lesson is not unique to one party or one decade: when the economy is shrinking, the policy that takes more from the people who are still producing needs a very good reason.

The steelman for the law

The strongest case for the 1930 tariff goes like this. American industry had grown behind protective walls for most of the previous century. Republicans of the age believed in them, as Republicans were the tariff party first, from Lincoln to McKinley explains. Farmers were in real distress in the 1920s. Hoover was keeping a campaign promise. And the tariff, its defenders said, would keep American markets for American workers when jobs were disappearing.

Here is the answer. First, the bill went far beyond what Hoover had promised, with rates raised on a vast list of goods that had nothing to do with farm relief. Second, the timing was catastrophic: a country that was losing its export markets raised the barriers against everyone who bought from it. Third, a tariff protects the jobs in the protected industry and costs the jobs in industries that use the product or sell abroad. The pattern is spelled out in who really pays a tariff, following the dollar from dock to shelf. And fourth, the economists said so in advance, which is the part that should make us humble. A thousand people with no shared politics, and no stake in the outcome, told the President what was coming.

The turn: Hull and 1934

After the election of Franklin Roosevelt in 1932 and the Democrats' sweep of Congress, the politics changed. Secretary of State Cordell Hull, a Tennessee Democrat who had been fighting high tariffs for decades, pushed through the Reciprocal Trade Agreements Act, signed in June 1934. It did something clever. Instead of letting Congress haggle over every rate, it authorized the President to negotiate tariff reductions with other countries, up to a set percentage, in exchange for matching concessions. It was a delegation of power from the legislature to the executive, and it was done on purpose to escape the log-rolling that produced Smoot-Hawley.

That is a constitutional point conservatives ought to chew on. Article I, Section 8 gives Congress the power to lay duties. Delegating that power to the President was a tradeoff: it made trade policy less subject to special interests and more subject to presidential judgement. Later laws, such as Section 232 of the Trade Expansion Act of 1962, extended presidential authority in other directions. Whether the pendulum has gone too far toward the executive is a reasonable argument for any conservative who cares about the separation of powers.

What a careful speaker may and may not say

You will be tempted, in an argument, to reach for Smoot-Hawley as a club or to push back when someone else does. Here is a short guide to what you can honestly say.

You may say:

• It raised duties on thousands of items and was signed by a Republican President over the objection of over a thousand economists.
• It provoked retaliation by trading partners, including Canada, and world trade fell sharply in the years that followed.
• It hurt American farmers and exporters.
• It was followed by the Reciprocal Trade Agreements Act of 1934, which moved toward lower tariffs by negotiation.

You may not honestly say:

• That it caused the Great Depression. The crash came first, and the banking and monetary collapse did most of the damage.
• That it did no harm. It added to the damage and soured the world economy.
• That it proves any particular tariff of any other era is a disaster. A different tariff in a different year, with different partners and a different economy, has to be judged on its own facts. That is true whether you are for tariffs or against them. For a calm look at the arguments both sides use, see seven trade myths both parties repeat, tested against the record and free trade, tariffs or managed trade, three theories side by side.

The bottom line

• Smoot-Hawley was signed on June 17, 1930, after the 1929 crash, over a petition from more than a thousand economists.
• It brought retaliation and a collapse in world trade, and it hurt farmers and exporters. It was an aggravating factor, not the cause of the Depression.
• The Depression's main drivers were the crash, the banking panics, the shrinking money supply and the gold standard.
• The Reciprocal Trade Agreements Act of 1934 moved tariff bargaining from Congress to the President, a trade-off between lobbyists and the separation of powers.
• Use the history carefully. If you cite it, cite it with the dates and the size of the effect, and you will out-argue anyone who treats it as a slogan.