Smoot-Hawley in 1930 and the Tariff Lesson Republicans Should Know Well

More than a thousand economists put their names to a letter in the spring of 1930. They did not agree on much. They came from universities all over the country and from every school of thought. But they agreed on this: the President of the United States should veto the tariff bill on his desk. Henry Ford, a man who knew a thing or two about American manufacturing, sent word that the bill was a mistake. So did the banker Thomas Lamont of J.P. Morgan. The President signed it anyway, on June 17, 1930.

The President was Herbert Hoover, a Republican. The bill was the Smoot-Hawley Tariff, named for Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon, both Republicans. It is, to this day, the most famous tariff in American history, and its name is used as shorthand for a policy mistake. If you are a conservative and you want to talk about tariffs honestly, you have to start here. Pretending it did not happen, or that it was somebody else's law, does the cause no favors. Let me tell you what happened, what the argument is about, and what I think it teaches.

A promise that grew

In the campaign of 1928, Hoover promised help for farmers, who had been struggling through the whole decade with low crop prices. One of his ideas was a limited revision of the tariff, aimed at agriculture and at a few industries that needed it. After he was elected, he called Congress into special session in the spring of 1929 to do that.

Then the legislative process did what the legislative process does. In the House, Chairman Hawley's Ways and Means Committee began with the farm rates and, because every member has a factory or a mine or a mill back home, added duties on industrial goods. The House passed a bill in May 1929. The Senate Finance Committee, under Reed Smoot, took up the bill, and the Senate spent the rest of the year and the first months of 1930 fighting over it. The famous log-rolling is not a legend. A member of the Senate who wanted a high rate on his state's product had to vote for the next senator's, and the next senator's, until the schedule covered thousands of items.

In October 1929, in the middle of all this, the stock market crashed. That is a point worth remembering: the bill was already moving through Congress when the crash happened. It did not cause the crash. It cleared Congress in the first half of 1930, in the first bad year of what became the Great Depression, and it was signed in June.

For the longer story of the party's relationship with duties, from the Morrill Tariff to this moment, see Why the Protective Tariff Was Republican Gospel From Morrill to McKinley. The details of what the law did, schedule by schedule, are in Smoot-Hawley, 1930, what the tariff did and what it did not do. Here I want to put the argument in a different frame.

The petition and the veto that did not come

Why did Hoover sign? He was no fool, and he had doubts. By most accounts he disliked many of the rates Congress had piled on. But he had three reasons for signing, and they are worth understanding.

First, he had promised farm relief, and he believed the bill delivered some. Second, he did not want a fight with his own party in Congress over something he had called for. Third, the law, like earlier tariff acts, contained a "flexible tariff" provision that let the President adjust rates up or down by as much as half, after a recommendation from the Tariff Commission. Hoover reasoned that he could use that power to fix the worst excesses later. In practice, the flexible provision proved slow and weak. It was not a fix.

It is easy now to say the President should have vetoed. The economists said so at the time. But let me be fair to Hoover as a man who faced a Congress of his own party, a farm crisis, and an economy that was just beginning to slide. He made a mistake. Honest conservatives can say so without declaring that he was a villain.

What came next: retaliation

Foreign governments did not take the new duties quietly. Canada, the largest customer for American goods at the time, raised its own tariffs on a range of U.S. products. Other countries, including France, Spain, Italy and Switzerland, took steps against American exports, from higher duties to boycotts. Spain's new tariff was aimed at American automobiles, and Switzerland's reaction included a campaign against American goods in response to duties on watches. Many of these countries had been among the best customers for American farm products and cars. Now they had both a reason and a pretext to buy elsewhere.

The effect was a spiral. As the world slid into depression, one country after another raised its barriers, and trade shrank. American exports fell sharply in the early 1930s, and farmers who had been promised relief found their overseas markets drying up. The tariff designed to help the American farmer ended up hurting him in the market that mattered, the one abroad.

What the economists actually argue about

Here the story gets complicated, and I would be misleading you if I told you the tariff caused the Depression. It did not, and few serious economists say it did. What caused the Depression is a long argument that includes the crash, the banking panics of the early 1930s, the gold standard and what the Federal Reserve did or failed to do. Milton Friedman and Anna Schwartz, in their Monetary History of the United States, argued that the money supply fell by roughly a third between 1929 and 1933 because of bank failures and monetary policy, and that this collapse was the central cause of the severity of the downturn. Others, like Barry Eichengreen, put more weight on the gold standard.

On the tariff itself, there are three positions, and I'll state them fairly.

1. The traditional view. Smoot-Hawley set off a wave of retaliation that shrank world trade and deepened the Depression in the United States and abroad. This was the version taught for decades.
2. The revisionist view. Douglas Irwin, a leading historian of American trade policy, argued in his book on the 1930 tariff that the direct effect on the American economy was modest. Only part of American imports were covered by the higher duties. The collapse in incomes and prices, which came from the depression itself, did most of the work of shrinking imports, and the retaliation, while real, hit particular industries and regions more than the whole. He does not say the tariff was harmless. He says it was not the main driver.
3. The political view. Whatever the economics, the law was a signal. It told the world that the United States, a creditor nation and the largest economy, was turning inward just as cooperation was needed. It soured relations with allies and gave ammunition to nationalists everywhere.

My own view is a combination. The best evidence says Smoot-Hawley did not cause the Depression and that its effect on the American economy as a whole was smaller than the legend says. But the best evidence also says it hurt American exporters, provoked foreign retaliation, and made a bad situation worse. It was a mistake, not a catastrophe. A mistake can be instructive without being the whole explanation for the disaster.

The politics did not forgive it. Smoot and Hawley both left Congress after the 1932 elections, and in that election Republicans lost the White House and Congress. The party spent years being the party of the tariff that had made things worse, whether or not that was fair.

The Democratic response, and the Republican turn

In 1934, with Franklin Roosevelt in office and Cordell Hull as Secretary of State, Congress passed the Reciprocal Trade Agreements Act. It let the President negotiate agreements with other countries to cut tariffs by as much as half, in exchange for reciprocal cuts from them, without having each rate approved by Congress. It was a direct answer to Smoot-Hawley: take tariff-writing out of the log-rolling business and put it into negotiations with specific goals. Most Republicans in Congress voted against it at first. Over the following decades, as the memory of 1930 sank in, the party's position shifted, and Republicans such as Dwight Eisenhower and Ronald Reagan worked within that framework of negotiated, reciprocal agreements. The history of how it evolved, from the Canada deal of 1989 to the North American agreement that followed, is in From the 1989 Canada deal to USMCA, a timeline of North American trade.

A worked example of the downstream problem

Let me put numbers on the idea that a tariff on one thing is a cost on another. This is a hypothetical, with round figures, and it is not a description of any real company.

Picture a small-town maker of farm implements, call it Prairie Iron, that builds 500 tractors a year. Each tractor uses $4,000 worth of steel. Congress puts a 25 percent duty on that steel, and domestic mills, now shielded from foreign competition, raise their own prices by the same 25 percent. Run the arithmetic: 4,000 times 0.25 is $1,000 more per tractor. Across 500 tractors, that is 1,000 times 500, or $500,000 a year in higher costs for Prairie Iron.

Now the company has three choices, and none is pleasant. It can raise the price of its tractors, in which case some farmers buy used equipment or wait. It can absorb the cost, in which case profits and perhaps wages shrink. Or it can lose sales to a foreign tractor maker that buys steel at the world price. The steel mill got the benefit, and a good number of the steel mill's workers may be glad of it. But the tractor plant's workers and the farmers who buy from it are paying for it. Whether the trade is worth it is a real question that reasonable people answer differently. What is not reasonable is pretending that the second cost does not exist.

Multiply that across thousands of items in a bill like Smoot-Hawley, and you see why so many economists in 1930 were alarmed. The tariff was a long chain of these small transfers, and the chain ran through every factory and farm that bought a taxed input.

A careful tariff doctrine in five tests

So what should a conservative take from it? Not "never use a tariff." The Republican tradition and the constitutional design both give tariffs a real place. Article I, Section 8 gives Congress the power to lay and collect duties. And later laws, such as the Trade Expansion Act of 1962 and the Trade Act of 1974, gave the executive branch targeted tools to respond to national security threats and unfair trade practices. The lesson is how to use the tool. Here are five tests, drawn from 1930, that I'd apply to any tariff proposal.

1. Name the goal. What is this tariff supposed to accomplish: a revenue source, protection for a specific industry, leverage in a negotiation, a national security safeguard? Smoot-Hawley's goal started as farm relief and ended as a general protectionist wall. A tariff without a stated goal cannot be judged.
2. Keep it targeted. The more items on the list, the more log-rolling. A narrow measure aimed at a specific problem is easier to defend and easier to measure than a sweeping schedule.
3. Count the downstream users. A tariff on steel helps the steel mill and costs the maker of cars, tools and appliances who buys it. The family at the end of the chain pays. Every tariff proposal should come with an honest count of the industries that use the taxed good. See who really pays a tariff, following the dollar from dock to shelf.
4. Build in reciprocity and an exit. Duties that can be traded away for access to foreign markets are a bargaining tool. Duties with no expiry date and no off-ramp are a wall.
5. Expect the reply. Other countries can raise their own duties. If your state sells soybeans, aircraft, or bourbon, you are on the list.

Run any proposal you hear about through those five tests. You'll be surprised how many fail one or more.

The strongest objection

The best argument against my reading goes like this: "You are overlearning the lesson. The Depression was not about tariffs, and the factory towns that have lost jobs to imports over the past several decades are real. Free trade has its own casualties, and it is naive to think that reciprocity agreements have opened foreign markets as promised. If you will not use tariffs, what is the alternative?"

That is a fair challenge. I agree that the loss of manufacturing jobs in certain communities is real, and that the people who live there do not want a lecture from an economist. I agree that tariffs can have a role. My answer is not that tariffs are never right. It is that the argument should be conducted with the tests above, not with a slogan on either side. A conservative who cares about the working family should want policy that is aimed, measured and honest about the cost. And for a fuller look at how different approaches compare, see free trade, tariffs or managed trade, three theories side by side, and for a look at the myths both parties repeat, seven trade myths both parties repeat, tested against the record.

The bottom line

• Smoot-Hawley was a Republican law, signed by a Republican President in June 1930 against the advice of more than a thousand economists. Know it, and say so before your opponents do.
• It did not cause the Depression, but it likely made things worse by provoking retaliation and shrinking markets for American farmers and manufacturers. The economists still argue over how much.
• A sound tariff doctrine asks five questions: what is the goal, is it targeted, who pays downstream, is there reciprocity and an exit, and how will others respond.
• When someone says tariffs are always a mistake, or always a magic cure, ask them to explain 1930. Then ask for their plan for your state's farmers and manufacturers.
• Before you back any trade proposal, read the actual text on Congress.gov and look at who in your district buys and sells abroad.