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Peddling Protectionism: Smoot-Hawley and the Great Depression
Published by EH.NET (July 2011)
Douglas A. Irwin, Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton, NJ: Princeton University Press, 2011. v + 244 pp. $25 (hardcover), ISBN: 978-0-691-15032-1.
Reviewed for EH.Net by Anthony Patrick O’Brien, Department of Economics, Lehigh University.
Economists love the Smoot-Hawley tariff. Why? Because economists hate tariffs and Smoot-Hawley is a great stick with which to beat the living daylights out of protectionists. “So, Mr. or Ms. Congressperson, you want to raise tariffs on imports from China? Trying to start a trade war? You know what happened the last time we tried that? We passed the Smoot-Hawley tariff and IT CAUSED THE GREAT DEPRESSION! Do you want to cause another Great Depression? Do you? Huh?” This nifty little trick worked like gangbusters for Al Gore in his debate with Ross Perot on Larry King Live years ago. True confessions time, though: It ain’t true. The Smoot-Hawley tariff didn’t cause the Great Depression. The Great Depression would still have been great even if Herbert Hoover had heeded the advice of those 1,000 economists who urged him to veto Smoot-Hawley.
Economists aren’t lying when they casually refer to Smoot-Hawley playing an important role in the Depression. (Most economists who have studied the issue know that it didn’t.) They think, vaguely: Tariffs Being Bad + Highest Tariff Rates Ever = Big Impact. Problem is that reasoning mixes micro with macro. Economists hate tariffs because they interfere with the pursuit of comparative advantage, misallocate resources, and, in that sense, lead to lower incomes ... in the long run. The macro of tariffs is murkier, though. The American on the street’s argument for protectionism goes like this: “Raise tariffs on imports so people will buy more things made in the USA. Then U.S. companies will produce more and hire more people.” The thing is, as a story about the short run, that reasoning may well be correct. Oh sure, foreign retaliation for tariff increases may slam domestic exports and there can be price level effects and exchange rate effects that have a contractionary impact, and so on. That’s why the macro of tariffs is murky. But, at any rate, it’s at least conceivable that Smoot-Hawley, rather than causing the Great Depression, actually caused U.S. production and employment in the early 1930s to expand. Not by much, mind you, because foreign trade was a tiny part of the U.S. economy at that time. But expand rather than contract.
It’s conceivable, but did it actually happen? That’s one of several questions pondered by Douglas Irwin in this superb new book. Irwin, who is Robert E. Maxwell ’23 Professor of Arts and Sciences at Dartmouth College, has for years now been playing the part of stalwart on the ramparts of free trade, including with his indispensible Against the Tide: An Intellectual History of Free Trade (Princeton University Press, 1996). In Peddling Protectionism, Irwin tells the story of the Smoot-Hawley tariff from its conception as an attempt by Republicans to aid a troubled agricultural sector – an amazing 18% of all farmers had their mortgages foreclosed on between 1926 and 1929 – through its implementation, effects on the U.S. and world economies, and later reputation. To many economic historians it will be a familiar tale, but one that is well told.
When Congress began work on the tariff in early 1929, newly elected President Herbert Hoover hoped that the bill could be confined to raising agricultural tariffs. In the end, though, the final bill was comprehensive and extraordinarily detailed. “Detailed” is an understatement; consider the following provision quoted by Irwin from paragraph 390 of Schedule 3: “Bottle caps of metal, collapsible tubes, and sprinkler tops, if not decorated, colored, waxed, lacquered, enameled, lithographed, electroplated, or embossed in color, 30 percent ad valorem; if decorated, colored, waxed, lacquered, enameled, lithographed, electroplated, or embossed in color, 45 percent ad valorem.” And there were nearly two hundred more closely-packed pages where that came from.
The Congressional debate dragged on for 18 months, although Irwin cites a number of economic historians who reject the idea that uncertainty caused by the debate led to the great stock market crash of October 1929. Hoover – to much criticism – had communicated little of his views to Congress during those 18 months, but he readily signed the bill after its final passage in June 1930. Hoover had famously received a petition signed by 1,028 economists urging him to veto the bill. Then as now, economists were held in warm regard by Congress; Senator Samuel Shortridge remarked: “I am not overawed and I am not at all disturbed by the proclamations of the college professors who never earned a dollar by the sweat of their brows by honest labor – theorists, dreamers – I am not so overawed or disturbed by their pronunciamentos ....” Irwin argues persuasively that Hoover, having failed during the prolonged Congressional debate to make his views known, had no choice politically other than to sign the bill because to veto it would have undercut the Republican Congressional leadership.
In discussing the economic effects of Smoot-Hawley, Irwin begins by noting that the bill actually raised tariffs by far less than had the Fordney-McCumber tariff of 1922. Fordney-McCumber had raised the average tariff rate by 64% (or by about 13 percentage points), whereas Smoot-Hawley increased the average tariff rate by 18% (or by 6.4 percentage points). Smoot-Hawley’s reputation for having raised tariff rates to “skyscraper” levels is due in part to the effects of falling prices of imports during the years following its passage. A specific duty – say, so many cents per bushel of wheat – will result in a tariff that is an increasing percentage of a good’s value as the price of the good falls. Although imports declined sharply in the early 1930s, most of that reduction is attributable to falling incomes in the United States, rather than to the effects of Smoot-Hawley. Irwin estimates that the Smoot-Hawley accounted for only about one third of the 40% decline in imports between 1929 and 1932.
Could this reduction in imports have stimulated production in the United States by the process of “expenditure switching” from imports to domestically produced goods? Irwin is skeptical that this effect was large, particularly given that foreign retaliation for Smoot-Hawley helped contribute to falling U.S. exports. In fact, he notes that retaliation by Canada alone resulted in as large a decrease in U.S. exports as the decline in imports attributable to Smoot-Hawley. He is also skeptical of the monetarist argument proposed by Allen Meltzer that Smoot-Hawley worsened the Great Depression by causing increased gold inflows into the United States, which led to deflationary pressure on other countries. Irwin notes that “one problem with this argument is that there was no apparent increase in U.S. gold inflows after the tariff was imposed.” Similarly, he doubts the argument that by reducing U.S. agricultural exports, foreign retaliation for Smoot-Hawley led to increasing defaults on farm mortgages, further weakening a reeling banking system. Irwin believes the problems in the agricultural sector had other causes, and, in any event, foreign retaliation for Smoot-Hawley mainly involved higher tariffs on U.S. manufacturing exports, not on agricultural exports. Finally, Irwin is skeptical of the argument that in a real business cycle model, Smoot-Hawley may have had a significant negative effect on output by raising the cost of intermediate goods. He notes that only about 11% of imports of intermediate goods were affected by the Smoot-Hawley increases. On balance, then, Irwin argues that Smoot-Hawley’s short-run effect on the U.S. economy was probably negative, but was certainly small.
Irwin’s book is not technical; he summarizes research findings, including his own, but does not formally present models or econometric results. His approach makes the book quite suitable for the interested general reader, undergraduates, and economic historians and other economists interested in the life and times of Smoot-Hawley. Finally, this volume is well priced for individual purchase and is nicely illustrated with a number of photographs and political cartoons of the day. It is also mercifully free of the typos that plague so many university press books these days.
Anthony Patrick O’Brien is a professor of economics at Lehigh University. He is the author of textbooks on principles of economics and money and banking (with Glenn Hubbard) and a textbook on intermediate macroeconomics (with Hubbard and Matthew Rafferty). He has published several articles on international trade during the interwar years, including most recently, “Retreat from Protectionism: R.B. Bennett and the Movement to Freer Trade in Canada, 1930-1935” (with Judith A. McDonald) in the Journal of Policy History. His email address is firstname.lastname@example.org.
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