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Britannica Concise Encyclopedia:

Smoot-Hawley Tariff Act


(1930) U.S. legislation that raised import duties by as much as 50%, adding considerable strain to the worldwide economic climate of the Great Depression. Despite a petition from 1,000 economists urging Pres. Herbert Hoover to veto the act, it was passed as a protective measure for domestic industries. It contributed to the early loss of confidence on Wall Street and signaled U.S. isolationism. Other countries retaliated with similarly high protective tariffs, and overseas banks began to collapse. In 1934 Pres. Franklin D. Roosevelt signed the Trade Agreements Act, which reduced such tariffs.

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Columbia Encyclopedia: Hawley-Smoot Tariff Act,
1930, passed by the U.S. Congress; it brought the U.S. tariff to the highest protective level yet in the history of the United States. President Hoover desired a limited upward revision of tariff rates with general increases on farm products and adjustment of a few industrial rates. A congressional joint committee, however, in compromising the differences between a high Senate tariff bill and a higher House tariff bill, arrived at new high rates by generally adopting the increased rates of the Senate on farm products and those of the House on manufactures. Despite wide protest, the tariff act, called the Hawley-Smoot Tariff Act because of its joint sponsorship by Representative Willis C. Hawley and Senator Reed Smoot, both Republicans, was signed (June, 1930) by President Hoover. The act brought retaliatory tariff acts from foreign countries, U.S. foreign trade suffered a sharp decline, and the depression intensified.

 
Act of Congress:

Smoot-Hawley Tariff Act (1930)

Many people reading this entry might know the following and no more about the Smoot-Hawley Tariff Act (P.L. 71-361, 46 Stat. 590):

Economics teacher: In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the ... Anyone? Anyone? ... the Great Depression, passed the ... Anyone? Anyone? The tariff bill? The Smoot-Hawley Tariff Act? Which, anyone? Raised or lowered? ... raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression. Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President [George H. W.] Bush called this in 1980? Anyone? Something-d-o-o economics. "Voodoo" economics.

Ah, yes, those lines delivered to a deeply disinterested high school class occur in one of the most memorable scenes in coming-of-age-film history. But what was not covered by actor Ben Stein—a speechwriter (under President Richard M. Nixon) turned comedian and actor—in that economics lecture? What else can this entry teach us about the economic climate surrounding the Smoot-Hawley Tariff Act that the film Ferris Bueller's Day Off (1986) did not? Anyone? Anyone? We will soon see.

The most important thing to know about the economic climate that spawned the Smoot-Hawley Tariff Act (and the other tariff bills that came before it) is this: in the days in which those acts were written, April 15 had much less significance than it does today. Federal income taxes, though authorized by the Sixteenth Amendment to the Constitution, were much lower and barely affected most Americans.

The Basics of Tariffs and Trade in American History

Tariffs had been a major topic of U.S. economic policy since 1789, when President George Washington's administration used a tariff to raise revenue to help fund the new national government. However, tariffs were used for other reasons as well. Sometimes the U.S. government placed tariffs on certain finished goods or raw materials to gain an economic advantage over foreign nations that sent a lot of goods to America. It also used these "protective tariffs" to keep foreign industries (for example, the English iron industry) from outselling and driving out of business comparable American industries (like the American iron and steel industry) because the foreign industry was either more established, had a better product, or sell their product at a cheaper price than could its American counterpart. The use of protective tariffs was a divisive issue to many Americans, such as those in the South, who sold agricultural goods or raw materials to overseas industries that would make the finished products. In fact, at times foreign nations who traded with America but were hurt by the use of these tariffs would enact their own tariffs on American goods sold in their country, therefore making the American goods more expensive abroad and less likely to be purchased.

So, tariffs could either be for revenue, trade, or protectionist purposes. In the economic climate of the late 1800s and early 1900s, the tariff issue came to a head in American politics.

Predecessors to the Act

In the 1890s following the Civil War, the nation was in a period of rapid growth. It went from thirty-five states in 1867 to forty-eight states in 1912, and with the growing national government came the responsibility for funding that government. America was just beginning to industrialize to a level where it could compete with other nations, however, it was not a leader in commercial production. The 1890s were still a period dominated by the United Kingdom and France. At the time, the British empire stretched over most of the world. The United States was still relatively young.

It was under these conditions that the McKinley Tariff was passed in 1890. In the presidential election of 1888, Republican Benjamin Harrison defeated Democrat Grover Cleveland, who had supported free trade (trade among nations without tariff restrictions). President Harrison's administration believed that American industries needed protection, so they wanted to pass protective tariffs. In fact, protectionist economic policies became the foundation of the Republican Party's economic outlook for the next two decades. The McKinley Tariff was the first in a string of tariff-raising bills that would set U.S. economic policy. It raised the tariff rate to a record high of 48 percent. It also set off a trend of American trading partners passing tariffs of their own in retaliation for the McKinley Tariff's passage.

The second major tariff passed during that era was the Payne-Aldrich Tariff. This bill, passed in 1909 by a Republican-controlled Congress, attempted to lower the average tariff rate paid on imported goods. However, the act caused little real change in the economic landscape of the United States. Politically, it angered progressive Democrats who had begun to gain some national prominence.

With Congress was so closely divided between the Democrats and Republicans, the Democrats were able to secure the proposal of the Sixteenth Amendment to the U.S. Constitution on July 12, 1909, in exchange for the Payne-Aldrich bill's passing. The Sixteenth Amendment was ratified on February 3, 1913, and created the federal income tax, giving the U.S. government an alternative manner in which they could fund the federal government. The United States then became less reliant on the income tariffs produced. At last, the Democrats had gained a foothold in developing the economic policies of the United States.

The final important precursor to the Smoot-Hawley Act was the Underwood-Simmons Tariff, which was passed in 1913 shortly after the Sixteenth Amendment was ratified. President Woodrow Wilson, who would lead the American people through World War I, was still in the early days of his first term. He appeared before a joint session of Congress, a rare occurrence, to make known his support for reforming U.S. tariff policies. Sponsored by Representative Oscar Underwood of Alabama in the House of Representatives and Senator F. M. Simmons of North Carolina in the Senate, the two legislators for whom the bill was named, this effort at tariff reduction eliminated tariffs on many goods, such as linens, iron, farm equipment, foods, and raw materials. Yet the effects of this legislation were largely unnoticed because, shortly after its passage, the world was thrown into World War I. International trade was hampered by aggressive military action taken by Germany, and the level of imported and exported goods dropped off significantly.

Postwar Economics and the Great Depression

The immediate economic boom right after World War I led to high expectations that were unrealized once the postwar economy returned to normal. Further, the policies passed during the 1920s reflected the Republican Party's belief that it was best to allow industry to drive the country as an economic engine. Congress passed bills setting low taxes on income and investment and establishing policies unfavorable toward international trade. However, a massive crisis unfolded that would severely hamper the nation's economy. In October of 1929 the stock market crashed, sending the country toward the Great Depression. Many major industries lost money in the market's crash, and workers at all levels were hurt either by the loss of their savings or their jobs. By 1932 almost one-quarter of Americans were unemployed.

It was in the middle of this rapidly deteriorating economic situation that the Smoot-Hawley Tariff Act was passed. The country sank deeper into the Great Depression because of the poor economic climate created in the 1920s, high unemployment rates, and other nations that enacted their own protectionist trade measures in retribution.

Bibliography

Bartlett, Bruce. "The Truth About Trade in History.".

United States Information Agency. "An Outline of American History: Chapter Nine: War, Prosperity, and Depression.".

 
Wikipedia: Smoot-Hawley Tariff Act
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 Tariff (or Smoot-Hawley Tariff Act)[1] was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the opinion of most economists, worsened the Great Depression. Many countries retaliated, and American exports and imports plunged by more than half.

What proponents of free trade fail to cite about Smoot-Hawley is that according to the U.S. Statistical Abstract, the effective tariff rate in 1929 was 13.5% and increased to only 19.8% in 1933.

In addition, imports in 1929 were only 4.2% of America's Gross National Product (GNP). Smoot-Hawley's impact on the entire U.S. economy was dwarfed in comparison to the monetary policy of the Federal Reserve System.

At the Silver Hearings held by the Senate Finance Committee in 1939, Senator Robert L. Owen, Chairman of the Senate Finance Committee said:

"When President Roosevelt came into power six years ago the outstanding currency on March 15, 1933 was $7.2 billion; then it was contracted by the Federal Reserve Board and only expanded by the purchase of silver certificates as to now reach the maximum of $6.7 billion. During the first year of Roosevelt's administration the Federal Reserve Board contracted the currency by two billion dollars."

A $2 billion contraction of a $7.2 billion money supply is a 27.8% reduction of the currency in circulation.

Some claim that this tight monetary policy was more to blame for the 23.6% unemployment rate in 1932 than the protectionist effects of Smoot-Hawley.


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 signed the bill. Hoover had, during the 1928 campaign, pledged to help beleaguered farmers by, among other things, raising tariff levels on agricultural products.

Opponents

One thousand and twenty-eight economists in the United States, organized by Paul Douglas, Irving Fisher, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox, and representing the "Who's Who" of the profession, signed a petition asking President Hoover to veto the legislation (New York Times , 5 May 1930).

Retaliation

Retaliation began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to raise rates against United States products, even though rates could be moved up or down in the Senate or by the conference committee. In all, 34 formal protests were lodged with the Department of State from foreign countries.

"Canada's Retailiation was striking. In May 1930, a month before Smoot Hawley was passed, Canada had fired a shot across U.S. bows by establishing new duties on 16 products involving about 30% of all US merchandies exports to Canada". [1]

Impact

Economic historians have made different estimates of the impact of this tariff on world trade; however, 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 international trade contracted by around 14% because of declining GNP in each country; 8% from increases in tariff rates; 5% because of deflation-induced tariff increases; and an extra 6% because of the imposition of nontariff barriers.

Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the U.S.," quadrupling previous tariff rates.

Although the tariff act was passed after the stock-market Crash of 1929, many economic historians consider the political discussion leading up to the passing of the act as a factor in causing the crash and its eventual passage as a factor in deepening the Great Depression.[2] Unemployment was at 9% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16% the next year and 25% two years after that.[citation needed]

As America and European countries increasingly resorted to protectionism as an economic policy, the general amount of international trade radically decreased, causing the world economy to slow.[citation needed]

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 to the Bretton Woods Agreement in 1944 and the General Agreement on Tariffs and Trade in the 1950s.

Abolitionalists of Smoot-Hawley argue that it angered major trading partners who retaliated. Canada for example raised its tariffs and forged closer economic links with the British Commonwealth, and U.S.-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 Gross Domestic Product. 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 U.S.

Causes

Recently, it has been argued that Smoot-Hawley was an attempt by the Republican Party to deal with the problem of overcapacity that plagued the U.S. economy in the 1910s and 1920s, which was the result of extremely-high-throughput, continuous-flow mass production and in agriculture the widespread efficiency gains brought on by the use of farm tractors. Rated capacity had increased tremendously; actual output, income and expenditure had not. Under the direction 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"[2].

Popular culture

Discussed during the classroom scene in the 1986 movie Ferris Bueller's Day Off. Ben Stein, as the dry high school economics teacher, attemps to draw a parallel between Hawley-Smoot and 1980s-era Reaganomics.

In the discussion leading up to the passage of NAFTA Vice President Al Gore mentioned the tariff as a rejoinder to NAFTA objections voiced by Ross Perot during a debate in 1996 they had on the Larry King show. He gave Perot a framed picture of Smoot and Hawley shaking hands after its passage.

In comedy, mention of the tariff is occasionally made when reference to a notably obscure event from American history is needed, as well as for its silly-sounding name. Humor writer Dave Barry does this repeatedly in his book Dave Barry Slept Here: A Sort of History of the United States.

See also

Notes

  1. ^ ch. 497, 46 Stat. 590, June 17, 1930, see 19 U.S.C. § 1654
  2. ^ Merill, Milton 1990, Reed Smoot: Apostle in Politics, Logan UT: Utah State Press. p. 340.

References

  • Beaudreau, Bernard C. 2005 Making Sense of Smoot-Hawley: Tariffs and Technology New York, NY: iUniverse.
  • Buchanan, Patrick J. The Great Betrayal: How American Sovereignty and Social Justice Are Being Sacrificed to... (1998)
  • Crucini, Mario J. and James Kahn. "Tariffs and Aggregate Economic Activity: Lessons from the Great Depression." Journal of Monetary Economics 38, no. 3 (1996): 427–67.
  • Crucini, Mario J. "Sources of variation in real tariff rates: The United States 1900 to 1940" American Economic Review 1994. 82: 346–53.
  • Eckes, Alfred. Opening America's Market: U.S. Foreign Trade Policy since 1776 (1995)
  • Eichengreen, Barry. "The Political Economy of the Smoot-Hawley Tariff." Research in Economic History 12 (1989): 1-43.
  • Irwin, Douglas. "The Smoot-Hawley Tariff: A Quantitative Assessment." Review of Economics and Statistics 80, no. 2 (1998): 326–334.
  • Kaplan, Edward S. American Trade Policy: 1923-1995 (1996)
  • Madsen, Jakob B.; "Trade Barriers and the Collapse of World Trade during the Great Depression" Southern Economic Journal Volume: 67. Issue: 4. 2001.
  • Judith McDonald, Anthony Patrick O'Brien, and Colleen Callahan. "Trade Wars: Canada's Reaction to the Smoot-Hawley Tariff." Journal of Economic History 57, no. 4 (1997).
  • Merill, Milton 1990, Reed Smoot: Apostle in Politics, Logan UT: Utah State Press.
  • O'Brien, Anthony, "Smoot-Hawley Tariff" EH Encyclopedia
  • Robert Pastor, Congress and the Politics of United States Foreign Economic Policy, 1929–1976 University of California Press, 1980.
  • Schattschneider, E. E. Politics, Pressures and the Tariff (1935). classic study of passage of Hawley-Smoot tariff
  • Taussig, F. W. The Tariff History of the United States. 8th edition (1931)
  • Temin, Peter. Lessons from the great depression MIT Press 1989
  • Tariffs and Trade in U.S. History: An Encyclopedia (2003, 3 vol) Edited by Elaine C. Prange Turney and Cynthia Clark Northrup

External links


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