The Smoot-Hawley Tariff Act

Brian Trumbore
President/Editor, StocksandNews.com

When the causes of the Great Depression are debated, at the top of the list is the Smoot-Hawley Tariff Act of 1930. Half of the sources listed it as Hawley-Smoot, but we'll go with the former. In light of President Bush's recent misguided steel tariff policy, a discussion of Smoot-Hawley (hereinafter, S-H) may provide us with a lesson or two, though as a free-trader myself, I have to admit my own mind was made up long ago.

In looking at the reasons behind the adoption of S-H, it is important to remember that the history of commerce in America was always one of high tariffs. It is a gross generalization, but for a young nation, the interests of the business community seemed to be best served by protecting our burgeoning industries, like in agriculture and textiles to name two, and our politicians were only too happy to comply by passing all manner of legislation towards that end.

Following World War I, however, U.S. business was particularly fearful that America would be flooded with the products of cheap European labor. Parts of Europe had been destroyed, nations had huge debts, and unemployment was rampant; thus, it's easy to see how costs could be lower than in the United States.

The cry for protectionism was far and wide, but President Woodrow Wilson vetoed strict tariff legislation in March 1921, weeks before he relinquished the presidency to Warren G. Harding, saying in part:

“If ever there was a time when Americans had anything to fear from foreign competition, that time has passed. If we wish to have Europe settle her debts, governmental or commercial, we must be prepared to buy from her.”

Alas, Harding came in and enacted the Emergency Tariff Act of May 1921, which supported agricultural interests in particular, while that was followed by the Fordney-McCumber Tariff Act of 1922. Signed into law on September 19, 1922, this latter legislation established the highest rates in history, with tariffs on some products of up to 400%. One Republican senator labeled Fordney “protection run perfectly mad.”

Fordney-McCumber precipitated a huge trade war, yet prosperity in America continued throughout the decade of the 1920s. As we've discussed in some other Wall Street History articles, though, by the end of this period, much of the prosperity resulted from growth on Wall Street and industrial America, while the farmers were suffering due to a worldwide glut of product.

But when it came time for the presidential election of 1928, Republicans looked at the overall economic climate across the country and reached the conclusion that high tariffs worked, so it was a major proponent of the party platform. Many Democrats supported tariffs as well, as the shape of commerce in the South changed to one less reliant on agriculture.

So after President Herbert Hoover took office in March 1929, Congress immediately set to work on a new tariff regime. This is an important point, because you have to picture that this legislation was winding its way through committee long before eventual passage in June 1930. In other words, it is a fair statement to say that the prospects for Smoot-Hawley had something to do with the October 1929 market crash itself.

Granted, this is highly debatable, but as Robert Shiller points out, on Monday, October 28, the New York Times ran a front-page story on possible passage of Smoot-Hawley, while on Tuesday the 29th, the day of the Crash, other national papers had picked up on the issue. Shiller acknowledges, however, that the Times ran various stories on Smoot-Hawley, both pro and con, and it would be ludicrous to pin the blame on it for the market turmoil that fall. Regardless, the point is that S-H was in the news for a long time.

As for Hoover, he was determined to raise tariffs and by June 1930, when a delegation of bishops and bankers paid him a visit to ask for more public works projects amidst a tumbling economy. The President told them, “Gentlemen, you have come sixty days too late. The Depression is over.” On June 16, he then issued a statement through the newspapers that he would be signing a bill, in an attempt to aid those businesses damaged by the downturn.